In which example may GDP understate social cost?
Answer and explanation
Correct answer: Illness among nearby residents caused by factory smoke
GDP counts the market value of the factory’s final output, but it does not automatically subtract every harmful effect imposed on people outside the transaction. Illness caused by smoke is a negative externality: affected residents bear a health and quality-of-life cost that may be missing from the factory’s market price. Hence C illustrates an understatement of social cost. The other examples generally represent valuable outputs or beneficial investments, although their full welfare effects still require careful assessment.
Frequently asked questions
What is the correct answer to this question?
Illness among nearby residents caused by factory smoke
Why is this the correct answer?
GDP counts the market value of the factory’s final output, but it does not automatically subtract every harmful effect imposed on people outside the transaction. Illness caused by smoke is a negative externality: affected residents bear a health and quality-of-life cost that may be missing from the factory’s market price. Hence C illustrates an understatement of social cost. The other examples generally represent valuable outputs or beneficial investments, although their full welfare effects still require careful assessment.
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.
