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.
Frequently asked questions
What is the correct answer to this question?
Output is recorded, but the negative externality is not deducted
Why is this the correct answer?
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.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates. Topic: GDP and Welfare.
