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A factory increases output but pollutes a river, and no market transaction occurs for cleanup. What problem arises in GDP measurement?

Answer and explanation

Correct answer: Output is recorded, but the negative externality is not deducted

GDP is based mainly on priced market production. The factory's sold output is recorded, but the river damage is a negative externality without a corresponding cleanup transaction or market price. Consequently, conventional GDP does not deduct that unpaid environmental cost, so measured output may overstate welfare. Option B is correct. A assumes a deduction that does not occur, C reverses what is recorded, and D confuses pollution with the classification of a good.

Related tags

Negative-ExternalityEnvironmentGdpGreen-WelfareGdp And WelfareNational Income And Related AggregatesEconomicsClass 11 Mcq

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