Market failure — practice question

Read the source material carefully before answering Question 1. Source material: The future of the economy of St. Kitts and Nevis St. Kitts and Nevis is a small Caribbean nation made up of two islands. Its three main industries are tourism, financial services and agriculture. Visitors are drawn to the country’s beaches, coral reefs, forts, rainforests and shipwrecks. However, if rainforests continue to be cleared and soil erosion keeps contaminating the coral reefs, killing off marine life, tourism may be discouraged. The Government of St. Kitts and Nevis is also worried that the social costs of tourism are greater than the private costs. St. Kitts and Nevis’s financial services include an expanding banking sector. A few foreign multinational companies (MNCs) are among the country’s commercial banks. These MNCs are attracted by the country’s relatively high incomes, the absence of personal income tax and a relatively high literacy rate. Some of the country’s chief agricultural products are carrots, onions, peanuts and sweet potatoes. In 2017, the Government of St. Kitts and Nevis launched a training scheme aimed at increasing the productivity of onion farmers. Other important industries in St. Kitts and Nevis include healthcare and fishing. Table 1.1 shows healthcare spending as a percentage of GDP and life expectancy in six selected countries in 2022. Because St. Kitts and Nevis has a very small fishing industry, it imports large amounts of fish. Its fishing boats are small and some do not have up-to-date equipment. A larger fishing industry, with bigger boats, could provide several benefits to the country. Changes in the structure and performance of industries in St. Kitts and Nevis may alter the country’s price level. From 2018 to 2020, the country had deflation. This influenced people’s purchasing power, saving and debts. It also affected the country’s exports and firms’ investment decisions.