Final answer:
If the external cost of producing a good is $380, the government could impose a tax to correct for this market failure, leading to a lower quantity of the good produced. The correct answer to the student's question is C) Tax; tax; less.
Step-by-step explanation:
When a government identifies an external cost, such as pollution, associated with the production of a good, it can impose a policy to correct this market failure. One common policy tool is the introduction of a tax on the producer. Imposing a tax on the producer who creates the external cost means the good will internalize this cost in its price. Consequently, this tax will shift the supply curve to the left, resulting in a higher equilibrium price and a lower quantity of the good produced, as the production becomes more expensive for the firm.
On the flip side, a government subsidy is used to encourage the production of a good, usually because it has positive externalities, or the government wants to lower the price for consumers. Subsidies decrease the cost of production, leading to an increased supply, which shifts the supply curve to the right. As a result, this produces a lower price and a higher quantity of the good.
Given this information, the correct answer for the student's question is C) Tax; tax; less. By imposing a tax equal to the external cost of $380, the government will effectively reduce the quantity of the good produced, aligning it closer to the socially optimal level.