Final answer:
The correct response to a negative externality like pollution is for the government to tax the good causing it to increase economic efficiency.
Step-by-step explanation:
When the production of a good generates a negative externality, such as pollution from an electricity producer, the market fails to represent all social costs. This situation is referred to as market failure because the private market does not achieve an efficient output the market produces too much of the polluting product since it does not account for the social costs of pollution. When this occurs, the optimal government intervention is often to tax the production of the good that generates the negative externality to correct for these unaccounted costs and thereby increase economic efficiency. Therefore, the correct answer is B) the government could increase economic efficiency by taxing the good producing the negative externality.
In the presence of negative externalities, such as pollution generated by electricity production, market failure occurs because the private market doesn't consider the full social costs associated with the activity. This results in an overproduction of the polluting product. To address this, the optimal government intervention is often to implement a tax on the production of the good causing the negative externality. By taxing the production, the government internalizes the external costs, making producers accountable for the societal impact of pollution. This corrective measure aligns private incentives with social welfare, fostering economic efficiency. The tax acts as a mechanism to reflect the true societal costs and encourages producers to factor in the negative externalities, leading to a more optimal and socially responsible level of production. Therefore, option B) stating that the government could increase economic efficiency by taxing the good producing the negative externality is accurate.