> If we have the option of industrialisation without pollution, why are the corporations polluting the air in your example?
Because it costs less. You can install a catalytic converter on a car and it substantially reduces certain types of pollutants, but catalytic converters cost money.
This is a tragedy of the commons problem. The emissions from your car over its lifetime cause e.g. $0.01 in damage to everyone in the city including you, which is a million people, so you'd be causing $10,000 in damage, and breathing the exhaust from a million cars over the same period would be causing $10,000 in damage to you. But breathing the exhaust from your car would only be causing $0.01 in damage to you. And a catalytic converter costs e.g. $500.
So you're better off if everyone has one including you, because you pay $500 and don't have to suffer $10,000 in damage. But you don't get the same result as an individual choice, because you'd rather suffer $0.01 worth of incremental damage than pay $500, and then what anyone else does is out of your hands, but they have the same individual incentive as you.
> The issue we face in the modern world is nobody knows how to do industrialisation without pollution. Governments banning pollution has just stifled industrialisation.
What we haven't figured out how to do is regulate pollution efficiently.
If you leave it up to individual choice it's a tragedy of the commons, but if you give it to elected officials it's the opposite problem. Someone proposes a rule that would impose enormous costs on the industry to prevent only 5% that much total damage. This isn't worth it, the cost/benefit is way underwater, but if you put it up for a vote, 95% of people don't work in the industry and don't care if they drive it out of the jurisdiction, so it passes.
So you need some kind of additional constraint on what regulations can pass that require them to survive a cost/benefit analysis, and we don't currently have an effective system for that. Maybe something like: The government has to provide a cost/benefit analysis for each provision of each regulation, provisions with negative expected value are stricken, and you can sue the government if their cost/benefit analysis is in conflict with reality.