Final answer:
The government combats externalities through taxes, tradable permits, and regulations to internalize the external costs of goods consumption and address market failures.
Step-by-step explanation:
Some of the government's solutions to externalities include imposing taxes on polluting goods, creating tradable permits for pollution, and enforcing command-and-control regulations. These measures aim to internalize the external costs of goods consumption by making firms accountable for the negative impacts of their production processes. For example, a tax on polluting goods equates to the cost of the externality, thereby influencing firms to produce at the socially optimal level that takes into account the external damages. Tradable permits limit the overall level of pollution and give firms the incentive to reduce emissions to save or sell permits. While these policies intend to mitigate market failures, effective implementation requires accurate information on the externalities' costs and the abatement benefits, recognizing the inherent imperfect nature of government intervention.