Here there are quotation marks, but the writer forgot to mention where the quote came from.

“But while the direct regulation of activities that cause pollution makes sense in some cases, it is seriously defective in others, because it does not offer any scope for flexibility and creativity.“

Sure, the reader knows you got the words from somewhere, but they have no clue where they came from.

Here there is a citation, but there are no quotation marks to indicate that these are Krugman's own words.

But while the direct regulation of activities that cause pollution makes sense in some cases, it is seriously defective in others, because it does not offer any scope for flexibility and creativity (Krugman, 2010, para. 9).

This looks like paraphrasing, but it's not.  It's plagiarism.

You need to have both quotation marks and a citation. Here's a good example of a simple direct quote.

“But while the direct regulation of activities that cause pollution makes sense in some cases, it is seriously defective in others, because it does not offer any scope for flexibility and creativity” (Krugman, 2010, para. 9).

Notice the use of quotation marks to set off Krugman's text, and the paranthetical note at the end.

If you're quoting a long passage of more than three or four lines (not usually recommended, but occasionally necessary and effective), use an indented block quote.  Here you omit the quotation marks ― the indentation serves to tell the reader the words are not your own.

Unfortunately, Paul Krugman (2010) has argued, one-size-fits-all regulations are not always effective.

Consider the biggest environmental issue of the 1980s ― acid rain. Emissions of sulfur dioxide from power plants, it turned out, tend to combine with water downwind and produce flora-and wildlife-destroying sulfuric acid. . . . Imposing a tough standard on all plants was problematic, because retrofitting some older plants would have been extremely expensive.  By regulating only new plants, however, the government passed up the opportunity to achieve fairly cheap pollution control at plants that were, in fact, easy to retrofit. (para. 9)

Note the use of the ellipsis (. . .), which indicates that part of the original text has been removed.  Long quotes should be used sparingly, and anything you can do to shorten them is good.  This example also shows a signal phrase ("Paul Krugman has argued"), which forms part of the citation and which gives extra emphasis to your source.

Paraphrasing is the art of putting material into your own words, instead of copying the original author's words directly.

It is difficult to learn how to do properly and requires much practice, but it is an essential skill in academic writing.  You may want to ask your professor or check with the Writing Center if you're not sure if you've done it properly.  Here are some examples to give you an idea of what it looks like.

One key misconception that students have is that as long as they change the words a bit, they no longer need to worry about citing.  However, paraphrasing isn't just about switching each individual word to a new one.

You can't simply open up a thesaurus and be done with it.

Now, a few examples of good and bad paraphrasing.

Here is an example of an attempt at paraphrasing that simply exchanges words for new ones, while leaving the basic structure and intent of the sentence intact.

Though sometimes the active policing of pollution-causing behavior is sensible, at other times it is badly flawed, since there is no capacity for change or originality.

Despite the changes, it's still the same sentence.  Putting something into "your own words" means rewriting the material into a new and different form.

You have to actually re-write the sentence from scratch.

This second example conveys the spirit of the original text, but with original wording. This is proper paraphrasing.

Unfortunately, one-size-fits-all pollution regulations that cannot accommodate unique situations or new developments may not be very effective (Krugman, 2010, para. 9).

Keep in mind that you still need to cite your source when paraphrasing, just as you do when using a direct quote.

The words in this last example are no longer Krugman's.  The idea behind them still is.

Style, sentence structure, and ideas matter just as much as words.

Finally, note that you can also combine a paraphrase with a direct quote, if you wish to capture some of the original text while putting the rest into your own wording.

Unfortunately, one-size-fits-all pollution regulations that “[do] not offer any scope for flexibility and creativity” may not be very effective (Krugman, 2010, para. 9).

Use this technique only if there are specific words in the original text that you feel must be included.

Otherwise, you might as well just paraphrase the whole thing.