Question

explain how 'externalities' is a limitation in taking gross domestic product as an indicator of welfare
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Answer 1

Answer:

Externality is a limitation as taking GDP as a index of welfare because increase in the national income is associated with increased levels of pollution, accidents, disasters, shortage and depletion of natural resources, etc. These factors affect human health and lead to ecological degradation.

Answer 2

Explain 'externalities' is a limitation in taking gross domestic product as an indicator of welfare.

• Moreover, urbanisation leads to housing issues, an increase in traffic accidents, etc. Overall, welfare declines, while the GDP calculation ignores this decline in benefit. We might therefore conclude that using the GDP as a measure of welfare may be constrained by externalities. Externalities are benefits or injuries that a company, person, or entity causes to another but for which they are not compensated or punished.
• Negative externalities: For instance, factory pollution reduces welfare but is not taken into account when assessing GDP, which overstates actual welfare.
• The concept's main shortcomings stem from the fact that it is not intended to assess happiness in the first place. As non-market activities, wealth distribution, the impact of externalities, and the kinds of commodities or services being produced inside the economy are not taken into account by GDP, these issues remain unaddressed.
• Externalities are the advantages (or disadvantages) a business or person causes to another without being compensated for them (or penalised). Example: An oil refinery polluting a river. Impact: Decreases welfare by having a detrimental impact on health.

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