Final answer:
The government should provide subsidies and tax incentives to encourage the production of products with external benefits like fuel-efficient cars, to correct for market failures and align private costs with social costs.
Step-by-step explanation:
To promote the efficient provision of products that have external benefits, such as fuel-efficient cars, the government should provide subsidies and tax incentives. This is because these products generate positive externalities that can benefit society at large, but the costs of production are borne by the private firm. Subsidies can help to lower the marginal private costs to be closer to the marginal social costs, increasing the production and sales of these products to a socially desirable level. Government intervention in this way supports free markets and corrects for market failures. When it comes to products with external benefits, taxing them or not intervening at all are not effective solutions because they do not address the central issue of underproduction resulting from external benefits not being reflected in market transactions. Regulation can also be an option, but it is often more about control than incentivizing increased production. Therefore, approaches like subsidies directly address the cost discrepancy and promote greater production and adoption of such socially beneficial products.