Market failure — practice question

Read the source material closely before you answer Question 1. Source material: The destruction of forests in Indonesia Indonesia is the biggest producer of palm oil in the world. The production costs of palm oil include land rent, fertiliser, palm oil seeds, upkeep of irrigation systems and casual labour. Forests are cleared by setting fires to create space for palm oil plantations. These fires destroy the habitats of many wildlife species and release harmful gases into the air. Since 2011, the Norwegian government has paid Indonesia to conserve its forests. Although Indonesia is the largest producer of palm oil, it ranks third for rice production. Indonesia exports 85% of its palm oil, but at times it must import rice to satisfy domestic demand. Its overseas trade in palm oil and rice is affected by movements in its foreign exchange rate. The value of the Indonesian currency, the rupiah, fell in 2017. Rice growing also adds to air pollution. After harvesting, rice farmers burn the stubble that remains to clear the fields and increase the fertility of the land so that they can grow more rice. Some environmentalists say that stubble burning ought to be banned. The Indonesian economy, together with the world economy, keeps expanding. Economic growth can create pollution. It can also influence a country’s GDP per head ranking and Human Development Index (HDI) ranking, as shown in Table 1.1. Indonesia has net emigration. Some Indonesians work overseas and remit money to their families at home. People also arrive from abroad to work in Indonesia, including some in comparatively well-paid jobs in the country’s growing tourism industry. Indonesia currently receives fewer tourists than its neighbours, Singapore and Malaysia. However, it has many natural tourist attractions and is presently price competitive.