Video Artifacts/Blocking

I think there are three seperate phenomena that are often conflated in the term blocking.

There is the Pixellation effect described elsewhere, there is the general low bitrate effect of the picture appearing to be made of little squares, and then there is the loss of detail in highly saturated areas associated with clipping (hard bitrate limiting), or excessive denoising.

The solution for low-bitrate type blocking is simply to raise the bitrate. Note that many encoding methods produce default bitrates that are insufficient. Try setting the bitrate explicitly. Mpeg2 seems to require roughly twice the bitrate of mpeg4 to produce the same image quality.

Loss of detail due to denoising is usually a matter of judgement on the part of the encoder. A balance must be struck between reasonable file size and visual quality.

Note that in it's extreme case clipping will result in garbled and skipped frames on playback.