A well-used copy of Firefox may contain cookies from hundreds of websites, including many you never visited, at least not explicitly. Cookies from sites such as Doubleclick.net and advertising.com are the tracking cookies that concern people.
To start fresh, Firefox offers two ways to remove all cookies, one manual, one automatic. The manual approach is the Remove All Cookies button, shown above. The automatic approach, one not offered by IE7, is to remove all cookies every time the browser shuts down.
Thus you can allow all cookies, yet the entire browsing history that any advertising network has on you is limited to the time between when Firefox starts and when it shuts down.
Every day, you'll start fresh; think Groundhog Day. To configure daily removal of all cookies, choose: Tools -> Options -> Privacy tab. Then turn on the checkbox shown below, to "Always clear my private data when I close Firefox".
Finally, click on the Settings button to make sure cookies are in the list of private data (shown below).
After having this configured, you can clear cookies, and any other private data you opted for in the window shown above, with Tools -> Clear Private Data.
Removing all cookies, however, is probably overkill - there are many good cookies. For example, cookies can be used with websites to remember who you are so that you don't have to repeatedly login. I personally benefit from this at the sites of The New York Times and The Wall Street Journal.
Cookies can also be used to save website preferences such as a color scheme or a font size. You can see an example of this at the preferences page of Karen Kenworthy's website. While you're there take a look at her software, it's first rate and free.
Why not just block all cookies? Because some websites may not function correctly without cookies. For example, if cookies are globally disabled, you can't log in to The New York Times website, even if you have a valid account.
So, if you care about the potential privacy issues that cookies pose and are willing to do without the conveniences offered by good cookies then remove all cookies when Firefox shuts down. This is one way to protect against any advertising network building up a long-term profile of your web browsing habits.
A less drastic approach, and one that should appeal to many people, is simply to disable third party cookies.
To illustrate what this does consider the home page of The New York Times.
Viewing the home page with third party cookies enabled may create cookies from pointroll.com, advertising.com, atwola.com, bluestreak.com, doubleclick.net and/or tacoda.net. Disabling third party cookies restricts it to only setting cookies for nytimes.com. The ads still display.