In which example does GDP understate social cost?
Answer and explanation
Correct answer: Illness among nearby people caused by factory smoke
GDP records the market value of factory output, but it does not fully deduct the unpriced harm imposed on nearby residents by smoke pollution. Their illness can create medical expenses that are counted as market activity, while pain, lost health and reduced quality of life are not properly subtracted. This is a negative externality, so option C is correct. The other examples describe production without the stated harmful spillover and therefore do not best illustrate understated social cost.
Frequently asked questions
What is the correct answer to this question?
Illness among nearby people caused by factory smoke
Why is this the correct answer?
GDP records the market value of factory output, but it does not fully deduct the unpriced harm imposed on nearby residents by smoke pollution. Their illness can create medical expenses that are counted as market activity, while pain, lost health and reduced quality of life are not properly subtracted. This is a negative externality, so option C is correct. The other examples describe production without the stated harmful spillover and therefore do not best illustrate understated social cost.
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.
