Before 1970, there were no rules governing the amount of sulfur dioxide that coal-burning power plants in the United States could emit. When sulfur dioxide is emitted into the air, it mixes with water and produces sulfuric acid, which falls to earth as acid rain. Acid rain is as acidic as lemon juice and has killed fish in lakes over a wide swath of the northeastern United States, damaged trees and crops, and in time even began to dissolve limestone buildings.

In 1970, Congress adopted the Clean Air Act, which set rules forcing power plants to reduce their emissions. And it worked—the acidity of rainfall declined significantly. Economists, however, argued that a more flexible system of rules that exploits the effectiveness of markets could reduce pollution at a lower cost. In 1990 this theory was put into effect with a modified version of the Clean Air Act. And guess what? The economists were right!

In this section we’ll look at the policies governments use to deal with pollution and at how economic analysis has been used to improve those policies.