An interesting example of a regulatory failure relates to electricity generating stations in the UK. Several thermal power stations in the UK were required to install flue-gas desulphurisation (FGD) plant in order to meet a national standard for sulphur emissions. The power stations fitted with FGD plant are not compensated for sulphur abatement. Electricity is purchased for the national grid on a competitive bidding system. The stations fitted with FGD are unable to compete on cost with other stations without that equipment, and as a result are withdrawn entirely from the grid at some times and operate below capacity at others.

Explain why this situation is socially inefficient, and suggest a means by which this inefficiency could be avoided.