Market failure — practice question

Read the source material thoroughly before answering Question 1. Source material: Forest destruction in Indonesia Indonesia is the world’s biggest producer of palm oil. The expenses of producing palm oil include land rent, fertiliser, palm oil seeds, upkeep of irrigation systems and casual labour. Forests are cleared by setting fires so that palm oil plantations can be created. These fires wipe out the homes of many wildlife species and put 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 sells 85% of its palm oil overseas but sometimes needs to bring in rice to satisfy domestic demand. Trade in palm oil and rice is affected by movements in the foreign exchange rate. The value of the Indonesian currency, the rupiah, dropped in 2017. Rice farming also adds to air pollution. After harvest, rice farmers burn the stubble left in the fields to clear them and to improve soil fertility so that they can grow more rice. Some environmentalists say that stubble burning ought to be outlawed. Both the Indonesian economy and the world economy keep expanding. Economic growth may create pollution. It can also influence a country’s GDP per head ranking and Human Development Index (HDI) ranking, as Table 1.1 shows. Indonesia has net emigration. Some Indonesians work overseas and transfer money back to their families. People also arrive from abroad to work in Indonesia, including some in relatively well-paid jobs in the country’s growing tourism industry. At present, Indonesia attracts fewer tourists than its neighbours, Singapore and Malaysia. Even so, it has many natural tourist attractions and is currently competitively priced.