How do government interventions, such as taxation, impact market efficiency in the presence of negative externalities?

Government interventions like taxation can help improve market efficiency when negative externalities, such as pollution, are present. A negative externality occurs when a product or activity causes harm to others who are not involved in the transaction, like a factory polluting the air. By imposing a tax on the factory, the government makes it more expensive for the factory to produce its goods, encouraging it to reduce pollution. This tax helps to align the private costs of production with the social costs, leading to a more efficient outcome where fewer harmful goods are produced. For example, if a factory is taxed based on the amount of pollution it produces, it may invest in cleaner technology, benefiting the environment and the community.