As Charles Fishman reports in our “One Decision” Briefcase (see “Cleaning Up”), Corning is investing heavily in diesel-filtration technology. In the teeth of the most recent recession, Corning dedicated itself to spending half a billion dollars on this technology – even as it cut its overall R&D budget by half.

Regulations being implemented around the world spurred Corning’s decision. In the United States, the Environmental Protection Agency will require that heavy-duty diesel trucks and buses made for model year 2007 use fuels that contain 97 percent less sulfur than is currently found in diesel fuel. The kind of filtration that Corning is developing will also be mandated for trucks and buses beginning in 2007 and for nonroad engines beginning in 2011.

Three decades ago, in response to the Clean Air Act of 1970, the company invented the ceramic material used in catalytic converters. It has led that business ever since. Corning sees an opportunity to do for diesel engines what it did for gasoline engines: it expects that, beginning in 2008, diesel emissions mitigation will be a billion-dollar-a-year market.

There’s a basic economics lesson in this. Free markets generate “externalities” – costs that neither the buyer nor the seller in a transaction will bear, and benefits that neither will enjoy. Air pollution is a textbook example of a negative externality: the bicyclist bears the cost of a driver’s exhaust.

Some negative externalities have no easy remedy. But in cases where the private sector can, given enough incentive, develop a technological fix, the solution is clear: the government must mandate the removal or reduction of the externality. Companies like Corning will take it from there.