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.
Frequently asked questions
What is the correct answer to this question?
GDP may rise while welfare falls
Why is this the correct answer?
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.
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.
