I am confused what is the correct usage of this

It would have been better if government banned the production of firecrackers

It would have been better if government had banned the production of firecrackers.

If both are correct then what is the difference between two.

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  • "It would be better if the government banned the production of firecrackers".The sentence refers to the future. Your second sentence refers to the past, expressing regret. – V.V. Nov 11 '15 at 18:51

The independent clause

It would have been better...

refers to a point in time in the past when a condition was not true.

To mark the fact that this condition was contrary to the reality, the tense is shifted towards the past relative to the point-in-time in question. A past time which is prior to a point in time also in the past is marked by the past perfect, had banned.

It would have been better if the Donner Party had brought more rations along back in 1846.

If you wish to refer to a condition that is contrary to fact now, at this moment, the independent clause becomes

It would be better...

and the tense of the condition shifts backwards in time relative to the present, and thus the simple past is used:

It would be better if cigarette manufacturers stopped marketing to children in the Pacific Rim.

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