If spending rises on both polluting production and pollution cleanup what may GDP show?
Answer and explanation
Correct answer: GDP may rise from both activities while net welfare remains doubtful
The governing concept is the limitation of GDP as a welfare measure and the treatment of defensive expenditure. Polluting production can add to measured market output, while paid cleanup services can also add to GDP because they are newly produced services. However, cleanup may merely repair damage caused by pollution rather than create a comparable improvement in welfare. Thus GDP may rise from both activities even while net welfare remains doubtful. Cleanup is not automatically excluded, and pollution does not always improve welfare.
Frequently asked questions
What is the correct answer to this question?
GDP may rise from both activities while net welfare remains doubtful
Why is this the correct answer?
The governing concept is the limitation of GDP as a welfare measure and the treatment of defensive expenditure. Polluting production can add to measured market output, while paid cleanup services can also add to GDP because they are newly produced services. However, cleanup may merely repair damage caused by pollution rather than create a comparable improvement in welfare. Thus GDP may rise from both activities even while net welfare remains doubtful. Cleanup is not automatically excluded, and pollution does not always improve welfare.
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.
