Rugby:
You are correct that if a plant is required to install pollution control equipment, that some share of the cost will be passed on to consumers.
Yet that in no way invalidates jshore’s point: an unregulated profit-maximizing firm will tend to pollute too much, to the extent that the cost of the firm’s pollutants (on health and other people’s property) do not show up on that firm’s balance sheet.
There are a number of ways to respond to this problem.
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The government can mandate certain forms of pollution control. This is the “command-control” solution.
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The government can put a tax (or price, if you will) on the pollution emissions, that are set at (ready?) the marginal damages of the last pound of soot/SO2/dioxin, whatever. Since all of the damages associated with pollution now show up on the firm’s balance sheet, we would expect it to hire sufficient numbers of engineers to reduce emissions to a more proper level.
(Note, however, that the proper level of pollution is probably not zero, at least for soot or SO2. There are typically more effective ways to enhance human health than to demand that firms adopt a literally-zero-emissions policy.)
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The government can decide how much it want all the firms to emit and sell or gave away tradeable pollution permits. Those firms finding it easy to cut emissions will sell their “pollution-rights” to those firms who, for whatever reason, find it expensive to reduce pollution further.
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Since you’re a libertarian, I’ll mention the Coase Theorem (which is actually more of a conjecture). If property rights are clearly defined, and it is easy for all partners to bargain with one another (at zero cost, actually), then the problem of externalities goes away.
The typical example is one of a laundry and a (small) coal mine. The coal mine pumps out soot, hurting the laundry’s business.
Scenario 1: Laundry has a right to clean air. Laundry sues coal mine. Coal mine desists or (if the price of coal is high, relative to cleaning) coal mine pays for laundry’s relocation.
Scenario 2: Coal mine has right to pump what it wants into environment. Laundry has to either install clothes dryers OR laundry bribes coal mine into closing shop.
In reality of course, bargaining can be expensive and difficult: in Coase’s terms, there are transactions costs. What makes his work interesting is that he goes on to say that the government should define property rights in such a way so as to minimize transactions costs.
[I suppose if this hijack continues any further that we should start a new thread.]