The most serious external costs in the modern world are surely those associated with actions that damage the environment—air pollution, water pollution, habitat destruction, and so on. Protection of the environment has become a major role of government in all advanced nations. In the United States, the Environmental Protection Agency is the principal enforcer of environmental policies at the national level, supported by the actions of state and local governments.

How does a country protect its environment? At present the main policy tools are environmental standards, rules that protect the environment by specifying actions by producers and consumers. A familiar example is the law that requires almost all vehicles to have catalytic converters, which reduce the emission of chemicals that can cause smog and lead to health problems. Other rules require communities to treat their sewage or factories to avoid or limit certain kinds of pollution. And as we just saw in the Economics in Action, environmental standards were put in place in 2014, compelling new coal- and gas-fired power plants to adopt cleaner-burning technologies.

Environmental standards came into widespread use in the 1960s and 1970s, and they have had considerable success in reducing pollution. For example, since the United States passed the Clean Air Act in 1970, overall emission of pollutants into the air has fallen by more than a third, even though the population has grown by a third and the size of the economy has more than doubled. Even in Los Angeles, still famous for its smog, the air has improved dramatically: in 1976 ozone levels in the South Coast Air Basin exceeded federal standards on 194 days; in 2013, on only 5 days.