If industrial production pollutes a river and lowers fishermen's income, what problem is shown?
Answer and explanation
Correct answer: Negative externality and social cost
The pollution imposes a cost on fishermen who are not part of the firm's private transaction. Therefore, the firm's private cost is lower than the total social cost, which includes the fishermen's lost income and environmental damage. This is a negative externality. Option A is opposite, double counting concerns valuation, and a transfer payment is not the issue here.
Frequently asked questions
What is the correct answer to this question?
Negative externality and social cost
Why is this the correct answer?
The pollution imposes a cost on fishermen who are not part of the firm's private transaction. Therefore, the firm's private cost is lower than the total social cost, which includes the fishermen's lost income and environmental damage. This is a negative externality. Option A is opposite, double counting concerns valuation, and a transfer payment is not the issue here.
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.
