The benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalised). What it is called?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Externalities
A factory that pollutes a river harms the people downstream but pays them nothing; a person who plants trees along a road gives shade to passers-by but is paid nothing for it. Such benefits (or harms) that a firm or an individual causes to another, for which they are not paid (or penalised), are called externalities.
The polluting factory is a negative externality and the shade-giving trees a positive externality. Neither has a market in which it can be bought and sold, which is why GDP does not take them into account.
Why the other options are incorrect
Option (1) Non-Monetary Exchanges — Incorrect. Non-monetary exchanges are activities carried out without the use of money, such as the domestic services done at home or barter. Something is still given and received in them, whereas an externality falls on a third party who has no part in any exchange.
Option (3) Transfer Payments — Incorrect. Transfer payments are money paid without any service in return, such as pensions and scholarships. They are payments, while an externality is an unpaid effect.
Option (4) Free Rider — Incorrect. A free rider is a person who enjoys a good without paying for it, as people can with a public good. It names the person who gains, not the benefit or harm caused to another.
Note: A similar question was also asked in CUET (UG) 2026 on 21-05-2026 (Slot 1).
NCERT (2025-26): “2.5 GDP and Welfare … Externalities: Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalised). Externalities do not have any market in which they can be bought and sold. For example, let us suppose there is an oil refinery which refines crude petroleum and sells it in the market. The output of the refinery is the amount of oil it refines. We can estimate the value added of the refinery by deducting the value of intermediate goods used by the refinery (crude oil in this case) from the value of its output. The value added of the refinery will be counted as part of the GDP of the economy. But in carrying out the production the refinery may also be polluting the nearby river. This may cause harm to the people who use the water of the river.…” |