Which of the following best describes a situation where government intervention may improve market efficiency due to externalities?

Government intervention can improve market efficiency when there are externalities, which are costs or benefits that affect people who are not directly involved in a transaction. For example, if a factory pollutes a river while producing goods, the pollution affects nearby residents who suffer from health problems and loss of clean water. In this case, the factory does not pay for the damage it causes, leading to overproduction and inefficiency in the market. By implementing regulations or taxes on the factory’s pollution, the government can encourage the factory to reduce its emissions, making the market more efficient and protecting the community. This way, the true costs of production are reflected in the price, leading to better outcomes for everyone involved.