Consider two countries, A and B, and suppose that both have identical physical endowments of, say, iron ore. But suppose that in country A, any profits that are made from mining the ore are subject to confiscation by the government, while on country B, there is no such risk. How does the risk of expropriation affect the economic endowment of the two nations? In which nation are people richer?
2007-09-27 18:56:50 · 4 answers · asked by Anonymous in Social Science ➔ Economics
Simply put, economics is case-analysis of incentives. The best way to answer your question is to address the different incentives set up in the two scenarios.
Let's start with country B. If a firm takes initiative, perhaps investing some capital in mining equipment, hiring trained miners, doing some investigation as to the best areas to mine, it can get revenue by selling the ore to smelters. If the revenue exceeds the initial capital cost as well as perseveres through the variable costs, the firm could turn a profit, and proper economic analysis by the firm will dictate that they should mine the ore and sell it. Now, natural resources are being utilized by the country, more transactions are occurring (even beyond the simple mining/smelting exchange), and society is better off (i.e. people are richer).
In country A, however, any profits that could be attained by mining the ore will go directly to the government. That means that after all the capital investment before any ore has even been mined, any profit made by the firm will be completely lost. Needless to say, the overall situation is much less lucrative for a private business. Why would anyone invest time and money into an endeavor without the ability to earn a profit (assuming they are not subsidized by the government)? Quite simply, they wouldn't; that ore wouldn't get mined, or at least not as much. Society in country A is now under-utilizing its natural resources, and is worse off.
Hope that helps.
2007-09-27 22:02:22 · answer #1 · answered by easymac 4 · 1⤊ 0⤋
Confiscation might be considered as a high tax on total output. High taxes don´t encourage business.
Country A will see how its growth is stopped by confiscation.
People are richer in country B.
2007-09-28 07:58:16 · answer #2 · answered by azkazk2005 6 · 0⤊ 0⤋
Does the government then redistribute the confiscated wealth back to the citizens?
2007-09-28 02:18:50 · answer #3 · answered by insuranceguytx 5 · 0⤊ 1⤋
Non.In either case,a government or a few people shall corner all the wealth.
2007-09-27 20:39:29 · answer #4 · answered by brkshandilya 7 · 0⤊ 1⤋