A government is considering implementing a tax on a company that produces pollution as a byproduct of its manufacturing process. Which of the following best explains the underlying market failure this tax aims to address?

The government is thinking about putting a tax on a company that pollutes because this pollution creates harm that affects everyone, not just the company. This situation is called a market failure because the company does not pay for the damage its pollution causes to the environment and people’s health. For example, if a factory releases smoke that makes the air dirty, nearby residents may get sick or have to spend money on healthcare, but the factory does not pay for these costs. By taxing the company, the government encourages it to reduce pollution, making the company think about the true cost of its actions. This helps protect the environment and public health, leading to a better outcome for society as a whole.