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A factory increases production but air pollution harms the health of nearby residents. What may happen to GDP and welfare?

Answer and explanation

Correct answer: GDP may rise while welfare falls

The governing concept is a negative externality. The factory’s recorded market production can increase measured GDP, while the unpriced pollution imposes medical, environmental, and quality-of-life costs on nearby residents. Those costs may reduce overall welfare even when output rises, so option A is correct. Both indicators need not move together: B is too certain, C ignores the production increase, and D wrongly assumes production is excluded from GDP.

Related tags

PollutionExternalityGdpWelfareEnvironmental CostGdp And WelfareNational Income And Related AggregatesEconomics

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