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What may be the effect of increased output of a polluting industry on GDP and welfare?

Answer and explanation

Correct answer: GDP will rise but welfare may fall

The governing concept is a negative externality. Higher production usually increases the recorded market value of final output, so GDP may rise, while smoke, illness and environmental damage impose costs on people that GDP does not fully subtract. Hence option C is correct. The words “may” and “can” matter because the welfare effect depends on the size of the pollution damage and any mitigation.

Related tags

PollutionNegative ExternalityGdpWelfareGdp And WelfareNational Income And Related AggregatesEconomicsClass 11 Mcq

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