If the government taxes polluting production and output falls slightly but air quality improves greatly what is a possible outcome?
Answer and explanation
Correct answer: GDP may fall slightly while welfare rises
GDP records market production, whereas social welfare also includes health, environmental quality, and avoided damage from negative externalities. A pollution tax can reduce the output of a harmful industry, causing measured GDP to fall slightly, while cleaner air lowers illness and improves life quality. Thus option C is possible and correct. Options A and B assume GDP and welfare always move together, while D ignores environmental benefits.
Frequently asked questions
What is the correct answer to this question?
GDP may fall slightly while welfare rises
Why is this the correct answer?
GDP records market production, whereas social welfare also includes health, environmental quality, and avoided damage from negative externalities. A pollution tax can reduce the output of a harmful industry, causing measured GDP to fall slightly, while cleaner air lowers illness and improves life quality. Thus option C is possible and correct. Options A and B assume GDP and welfare always move together, while D ignores environmental benefits.
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.
