What role does the government play in addressing social costs?

The government plays a significant role in addressing social costs, particularly through the regulation of activities that generate negative externalities, or costs imposed on society that are not reflected in market prices. By regulating or levying taxes on activities that create these external costs, the government can help align private interests with social welfare. This is often seen in cases such as pollution control, where companies might be taxed based on the amount of pollution they emit. This tax serves to internalize the externality, encouraging businesses to reduce their harmful effects on the environment.

Additionally, regulations can take the form of standards that limit negative behaviors, ensuring that businesses consider the broader implications of their actions. The intent is to correct market failures where the free market does not account for social costs, thus promoting a more efficient allocation of resources that benefits society as a whole. This proactive approach contrasts with other options that do not effectively address the issue of social costs.