In free indirect discourse, a third-person narrator adopts a character’s language without quotation marks. What does this achieve in Madame Bovary?

B. The reader is inside Emma’s judgements and outside them at once

It puts the reader inside and outside at once. When the prose describes something in Emma’s vocabulary, we get her evaluation and, simultaneously, the distance that shows what it costs her. The irony needs no narrator to point it out, which is why the technique was such an advance.