17.1 The Economic Rationale for

Reducing Pollution

As a consequence of producing or consuming goods and services, “bads”
are produced as well. Steel plants produce smoke in addition to steel.
Farms produce chemical runoff as well as food. Logging leads to soil
erosion that contaminates fish breeding grounds. Cars, trucks, and
factories burn fossil fuels, which produce carbon dioxide and other
greenhouse gases that contribute to global climate change. Households
produce human waste and garbage as they consume goods and services.

In all of these cases, the acts of production and consumption
automatically generate pollution, which is a negative externality. As we
saw in Chapter 16 , externalities are an important type of market failure
and lead to an inefficient allocation of resources. This inefficiency
provides the rationale for government policy to improve the market
outcome.

Pollution as an Externality

Polluting firms that are profit maximizers do not regard a clean
environment as a scarce resource and therefore fail to consider the full
costs of using this resource when producing their product. When a paper
mill produces newsprint, the production affects more than just the firm’s

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