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A factory raises output but also causes severe air pollution. What is the likely effect on GDP and welfare?

Answer and explanation

Correct answer: GDP may rise while welfare may fall

GDP measures the market value of current final goods and services, so the factory’s additional production can raise GDP. Welfare is broader because it also reflects health, environmental quality, and social costs. Severe pollution is a negative externality that may harm people and impose medical or cleanup costs. Therefore, GDP may increase while overall welfare decreases; equal movement is not necessary.

Related tags

GdpWelfarePollutionNegative-ExternalityGdp And WelfareNational Income And Related AggregatesEconomicsClass 11 Mcq

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