A city is facing significant air pollution due to a local factory's copper production. The factory's management argues that their private costs of production are low, but city residents are suffering health issues and decreased property values due to the pollution. Given this scenario, which of the following actions should the local government take to align the factory's production with social welfare?

In this situation, the local government should consider implementing regulations or taxes on the factory to address the negative effects of pollution, known as externalities. The factory's low private costs do not reflect the harm caused to residents, such as health problems and reduced property values. By imposing a tax equal to the estimated cost of the pollution, the factory would have to account for these external costs, encouraging them to reduce emissions or invest in cleaner technologies. For example, if the pollution is causing health costs of $100,000 a year for residents, a tax could be set at that amount to motivate the factory to lessen its environmental impact. This way, the factory can continue operating while also contributing to the well-being of the community, aligning its production with social welfare.