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Question
What is the effect of negative externalities on the measurement of welfare by GDP?
Options
GDP overestimates the actual welfare of the economy.
GDP excludes all market production.
GDP underestimates the actual welfare of the economy.
GDP measures the welfare of every person equally.
MCQ
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Solution
Negative externalities reduce welfare, but these welfare losses are ignored in GDP. Therefore, GDP overestimates the actual welfare of the economy.
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