We are always better off having many policies that can achieve a given
objective because it extends the criteria that can be included in pol
icy selection. This paper studies the equivalence between taxes and su
bsidies in the control of negative production externalities. In our mo
dels, under the tax regime, firms that take no treatment action to mit
igate the damage caused by their negative externalities are punished,
whereas under the subsidy regime, firms are rewarded for externality t
reatment activities. We employ a formulation where firms differ in the
vintage of their production technology and as a result differ in prof
itability, negative externality generation, and the cost of treatment.
We consider three measures as policy objectives: total output, total
damage from negative externalities, and social welfare. We find reason
able conditions where, with an appropriate setting of uniform lump-sum
and unit subsidies, the policy maker can achieve a pair of policy obj
ectives equivalent to those obtained using unit taxes. Thus, either ta
x or subsidy regimes can be used to achieve desired levels of one or t
wo policy objectives, allowing other factors such as fairness, equity,
or international trade issues to be considered in policy selection.