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In which example does GDP understate social cost?

Answer and explanation

Correct answer: Illness among nearby people caused by factory smoke

GDP records the market value of factory output, but it does not fully deduct the unpriced harm imposed on nearby residents by smoke pollution. Their illness can create medical expenses that are counted as market activity, while pain, lost health and reduced quality of life are not properly subtracted. This is a negative externality, so option C is correct. The other examples describe production without the stated harmful spillover and therefore do not best illustrate understated social cost.

Related tags

Negative ExternalityFactory PollutionSocial CostGdp And WelfareNational Income And Related AggregatesEconomicsClass 11 Mcq

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