death rate from tuberculosis was double that of the rest of Tennessee and triple that of the rest of the United

States, a city in which the filth in the air was so bad it melted nylon stockings off women’s legs, in which

executives kept supplies of clean white shirts in their offices so they could change when a shirt became too

gray to be presentable, in which headlights were turned on at high noon because the sun was eclipsed by the

gunk in the sky.”

The problem of pollution arises for every economy in the world, whether high-income or low-income, and

whether market-oriented or command-oriented. Every country needs to strike some balance between

production and environmental quality. This chapter begins by discussing how firms may fail to take certain

social costs, like pollution, into their planning if they do not need to pay these costs. Traditionally, policies for

environmental protection have focused on governmental limits on how much of each pollutant could be
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