If real output rises by eight percent and the monetary estimate of environmental damage rises by two percent, what should be done in welfare analysis?
Answer and explanation
Correct answer: Both output benefits and environmental costs should be compared
Real GDP growth measures an increase in the quantity of final output after removing the effect of price changes, but it is not a complete welfare measure. If environmental damage also increases, the analysis must compare the additional benefit from output with the associated social cost. The relevant idea is the net effect on welfare, not a mechanical acceptance of the larger percentage. Thus A is correct; B and C ignore external costs, while D wrongly discards a useful indicator.
Frequently asked questions
What is the correct answer to this question?
Both output benefits and environmental costs should be compared
Why is this the correct answer?
Real GDP growth measures an increase in the quantity of final output after removing the effect of price changes, but it is not a complete welfare measure. If environmental damage also increases, the analysis must compare the additional benefit from output with the associated social cost. The relevant idea is the net effect on welfare, not a mechanical acceptance of the larger percentage. Thus A is correct; B and C ignore external costs, while D wrongly discards a useful indicator.
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.
