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If the government taxes polluting production and output falls slightly but air quality improves greatly what is a possible outcome?

Answer and explanation

Correct answer: GDP may fall slightly while welfare rises

GDP records market production, whereas social welfare also includes health, environmental quality, and avoided damage from negative externalities. A pollution tax can reduce the output of a harmful industry, causing measured GDP to fall slightly, while cleaner air lowers illness and improves life quality. Thus option C is possible and correct. Options A and B assume GDP and welfare always move together, while D ignores environmental benefits.

Related tags

GdpWelfareEnvironmental-TaxExternalityGdp And WelfareNational Income And Related AggregatesEconomicsClass 11 Mcq

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