Omitted Environmental Damage
In addition to omitting activities,sometimes GDP omits some of the harmful side effects of economic activity,An important example is the omission of environmental damages. For example, suppose the residents of Suburbia buy 10 million kilowatt-hours of electricity to cool their houses, paying Utility Co. 10 cents per That $1 million covers the labor plant costs, and fuel costs.
But suppose the company damages the neighborhood with pollution in the process : of producing electricity, It incurs no monetary costs for this externalize. Our measure of output should . not only add in tile value of the electricity (which GDP does) but also subtract the environmental damage caused by the pollution (which GDP does not). Suppose that ill addition to paying 10 cents of direct costs, the surrounding neighborhood suffers 1 cent’ per kilowatt-hour of environmental damage.
This is the cost of pollution (to trees, trout, streams and people) not paid by Utility Co. Then the total “external” cost is $100,000. To correct for this hid- .den cost in a set of augmented accounts, we must subtract $100,000 of “pollution bad” from the $1,000,000 flow of “electricity goods.”