Traditional regulatory programs impose uniform requirements on all of the persons or firms within designated categories subject to the program. For example, in the context of land use, communities generally issue zoning regulations that rigidly divide land into categories such as residential and commercial, and they impose a set of restrictions on all of the land within each category. Similarly, many air and water pollution control laws require all sources within particular categories to comply with identical schedules that designate limits on discharges or emissions of specified pollutants. Because all sources face a rigid ceiling, firms have no incentive to reduce discharges below the prescribed limits. The result is a great deal of waste because policymakers ignore the varying potential for sources to reduce their discharges of pollution. Moreover, firms regulated by programs embodying this approach have little or no economic incentive to reduce their discharges below the permitted level.

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