In the EU, nitrate pollution from agriculture is regulated by a command and control approach ‐ the Nitrates Directive, with which all member states are expected to comply. Nitrogen restrictions impose production constraints on some farms and can result in reductions in farm income. This paper employs positive mathematical programming (PMP) to estimate the impact of nitrogen restrictions on farm incomes among dairy farms in the Republic of Ireland. The paper also investigates if compliance with the Nitrates Directive in terms of nitrogen application rates would be achieved more effectively by regulation than by taxation. Results show that restrictions on nitrogen use under the Nitrates Directive Action Plan imposes a cost on intensive dairy farms with reductions in income ranging from 0.1% cent to 36%. Findings also show that the limits on applications of nitrogenous material on dairy farms in Ireland would be achieved more effectively and more equitably by regulation than by a uniform tax on nitrogen fertilizer. In some cases a tax on inorganic nitrogen is found to be an ineffective way of achieving the levels of organic nitrogen permitted under the Nitrates Directive.