In which example may GDP understate social cost?

Correct answer: Illness among nearby residents caused by factory smoke

GDP counts the market value of the factory’s final output, but it does not automatically subtract every harmful effect imposed on people outside the transaction. Illness caused by smoke is a negative externality: affected residents bear a health and quality-of-life cost that may be missing from the factory’s market price. Hence C illustrates an understatement of social cost. The other examples generally represent valuable outputs or beneficial investments, although their full welfare effects still require careful assessment.