An alternative to pollution taxes and government regulation is for the
polluters and those affected to come to a bargaining
solution where the latter are compensated.
from the University of Chicago, was the first to see that if property
rights are fully assigned and if people can negotiate at low cost with
one another they will arrive at efficient solutions to problems caused by
externalities without the need for explicit government intervention in the
form of regulation and/or taxation.
This insight is called the Coase
Theorem, and on the strength of it Coase was awarded the Nobel Prize in
Economics in 1991.