What may be the effect of increased output of a polluting industry on GDP and welfare?
Answer and explanation
Correct answer: GDP will rise but welfare may fall
The governing concept is a negative externality. Higher production usually increases the recorded market value of final output, so GDP may rise, while smoke, illness and environmental damage impose costs on people that GDP does not fully subtract. Hence option C is correct. The words “may” and “can” matter because the welfare effect depends on the size of the pollution damage and any mitigation.
Frequently asked questions
What is the correct answer to this question?
GDP will rise but welfare may fall
Why is this the correct answer?
The governing concept is a negative externality. Higher production usually increases the recorded market value of final output, so GDP may rise, while smoke, illness and environmental damage impose costs on people that GDP does not fully subtract. Hence option C is correct. The words “may” and “can” matter because the welfare effect depends on the size of the pollution damage and any mitigation.
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.
