Given below are two statements: one is labelled as Assertion (A) and the other is labelled as Reason (R).
Assertion (A): When an oil refinery pollutes a nearby river, GDP overestimates the welfare of the economy.
Reason (R): The value added of a refinery is the value of its output minus the value of the crude oil it uses.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Both statements are true. R tells us how the refinery’s output enters GDP. It says nothing about the harm the refinery does to others.
Assertion (A): When an oil refinery pollutes a nearby river, GDP overestimates the welfare of the economy. — True. The refinery’s value added is counted in GDP, but the fall in the well-being of people who use the river is not subtracted.
Reason (R): The value added of a refinery is the value of its output minus the value of the crude oil it uses. — True. Crude oil is the intermediate good here, so it is deducted from the value of output.
Why R does not explain A?
R only shows how much the refinery adds to GDP. Even a correct value added does not show the damage to the river and the fishermen.
The real explanation of A: the pollution is a negative externality. The refinery harms others but bears no cost for it, so GDP leaves the harm out.
NCERT (2026-27): “2.5 GDP AND WELFARE … 3. 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. Hence their well being will fall. … Such harmful effects that the refinery is inflicting on others, for which it will not bear any cost, are called externalities. In this case, the GDP is not taking into account such negative externalities. Therefore, if we take GDP as a measure of welfare of the economy we shall be overestimating the actual welfare.” |