A factory raises output but also causes severe air pollution. What is the likely effect on GDP and welfare?
Answer and explanation
Correct answer: GDP may rise while welfare may fall
GDP measures the market value of current final goods and services, so the factory’s additional production can raise GDP. Welfare is broader because it also reflects health, environmental quality, and social costs. Severe pollution is a negative externality that may harm people and impose medical or cleanup costs. Therefore, GDP may increase while overall welfare decreases; equal movement is not necessary.
Frequently asked questions
What is the correct answer to this question?
GDP may rise while welfare may fall
Why is this the correct answer?
GDP measures the market value of current final goods and services, so the factory’s additional production can raise GDP. Welfare is broader because it also reflects health, environmental quality, and social costs. Severe pollution is a negative externality that may harm people and impose medical or cleanup costs. Therefore, GDP may increase while overall welfare decreases; equal movement is not necessary.
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.
