A local factory emits pollution that affects the health of nearby residents. The factory's production cost, which does not include the health impacts on residents, is lower than the social cost of production when accounting for these health issues. What is the most appropriate action for the government to take in this situation to correct the market failure?

In this situation, the government needs to intervene to address the market failure caused by the factory's pollution. The factory's production cost does not reflect the negative health impacts on nearby residents, which means the true cost of production is higher than what the factory is accounting for. To correct this, the government can impose a tax on the factory based on the level of pollution it produces. This tax would encourage the factory to reduce emissions and consider the health impacts in its production decisions. For example, if the tax makes it more expensive to pollute, the factory might invest in cleaner technologies, benefiting both the environment and the health of local residents.