Market failure — practice question

Study the source material carefully before you answer Question 1. Source material: Air pollution in India As India expands output, pollution rises. The government supports economic growth by encouraging investment and free trade. It is thinking about reducing taxes, increasing spending on education, cutting import tariffs and abolishing some import quotas. The Indian government intervenes in the economy for several reasons, including reducing pollution. Pollution is caused by vehicles and by factories in the private and public sectors that release harmful gases. Because the cost of making cars has fallen and incomes are rising, more cars are now being produced and bought in India. Producers and car users make choices using only their private costs and benefits. After harvesting, some farmers burn their fields to improve the growth of the next crop, even though this creates pollution. Also, some mine owners do not take enough care to stop minerals and metals from leaking into local water supplies. In addition to its effect on pollution, the relative size of the primary sector can also affect average income, as shown in Table 1. To cut pollution, the Indian government subsidises bus travel. It also insists that buses operate on natural gas instead of the more polluting diesel and petrol. Lower pollution may attract more foreign tourists. Foreign tourism and movements in the foreign exchange rate influence a country’s current account in the balance of payments. It has been forecast that India’s foreign exchange rate is likely to increase in the future.