True or false?
The correct answer is true. Environmental pollution frequently occurs as a by-product of the process of producing useful goods and services. The environmental costs must be traded off against the benefits from the good whose production leads to the pollution. It is often optimal to reduce the degree of pollution by taxing the product or by taxing production of the polluting by-product. These taxes should bring the private cost of producing final goods and services into equality with the social cost of producing them, to ensure that free market forces lead to the optimal output.
A seemingly paradoxical implication is that, purely from the point of view of efficiency, there may be an optimum amount of pollution. If pollution is at the optimum level the marginal benefit from reducing the level of pollution will be less than the marginal cost in terms of reduced output of final goods and services or increased expenditure on pollution limiting devices. Similarly, the marginal cost in terms of environmental damage from increasing the level of pollution will be greater than the marginal benefit from increased output of final goods or from reducing the expenditure on pollution inhibiting devices.
It might seem that increased risk of death from cancer and heart disease resulting from environmental damage creates an open and shut case for eliminating activities that have these harmful effects. Such a conclusion is unwarranted because many risks to human life are worth taking. People ride motorcycles, drive cars in bad weather, smoke cigarettes, eat fatty foods, and so forth. If one were to maximize the human lifespan by refraining from these activities and doing without modern conveniences whose production has environmental side-effects, the quality of life would be lower. The problem is not to eliminate all threats to human life, but to control such life-threatening activities at levels that equate the marginal costs in terms of reduced length of life with the marginal benefits in terms of quality of life.