Question

Consider two countries, A and B. Assume that both countries have identical physical endowments of iron ore. In country A any profits made from mining the iron ore are subject to confiscation by the government. While in country B. there is no such risk. How does the risk of expropriation affect the economic endowments of the two nations? Which nation would you think would be richer? Why? Given your answer to the above, why is there widespread political support for government policies that expropriate resources from some groups for the sole purpose of handing them out to other groups?

Answer 1

In the mentioned case Country A follows a regime driven economy where government restricts the concept of free trade which is lead by principles of demand, supply, competition, etc. It focuses on restricting the profits from mining so that the corporations or miners cannot exploit the resources and cannot disturb the social welfare.

However, in case of Country B the business is driven by the fundamentals of economics where demand, supply, competition and profits are the major factors. The government promotes free trade system where players with strong product and sales earn the profits.

Taking into consideration the above observations Country B will be richer because the producers will be motivated to operate the business at full capacity as there is no unwanted hurdles from government that diminishes their profits. By increasing the profits, the companies will be paying more taxes on them which will result in increased revenue for the government.

A country like Country A adopts a system like it does because it believes the government will look after its people by evenly distributing the resources among all the players but it ultimately creates more wastage, survival of weak players and misuse of resources who lack capacity and knowledge to process the goods.