The cost of negative externalities that harm the environment, such as pollution costs:

a. cause GDP to underestimate true welfare in the economy.

b. are not included in GDP.

c. cause GDP to decline, but by only the cost of cleanup.

d. negatively affect the level of GDP by the full amount of the damage.

Question

Azaria Galvan

Business

14 May, 00:45

The cost of negative externalities that harm the environment, such as pollution costs:

a. cause GDP to underestimate true welfare in the economy.

b. are not included in GDP.

c. cause GDP to decline, but by only the cost of cleanup.

d. negatively affect the level of GDP by the full amount of the damage.

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Answers (1)

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Laci Singh · Answer 1

a. cause GDP to underestimate true welfare in the economy.

Explanation:

GDP is the total value of goods & services produced by an economy during a period of time.

Externalities are extra harm or benefit to un-involved parties, without any monetary exchange for the same.

Extra benefit to other parties are Positive Externalities, Eg - Education benefit trickling down to society. Extra harm to other parties are Negative Externalities, Eg - Pollution harming society.

GDP i. e Flow of goods & services is only a measure of material welfare, because it ignores qualitative welfare elements like externalities.

Negative Externalities are harm to people's welfare, without monetary exchange. So, this makes GDP as an under estimated measure of welfare.

The cost of negative externalities that harm the environment, such as pollution costs:a. cause GDP to underestimate true welfare in the economy.b. are not included in GDP.c. cause GDP to decline, but by only the cost of cleanup.d. negatively affect the level of GDP by the full amount of the damage.