If real output rises by eight percent and the monetary estimate of environmental damage rises by two percent, what should be done in welfare analysis?

Correct answer: Both output benefits and environmental costs should be compared

Real GDP growth measures an increase in the quantity of final output after removing the effect of price changes, but it is not a complete welfare measure. If environmental damage also increases, the analysis must compare the additional benefit from output with the associated social cost. The relevant idea is the net effect on welfare, not a mechanical acceptance of the larger percentage. Thus A is correct; B and C ignore external costs, while D wrongly discards a useful indicator.