Question

1. Why Natural Resources Are a Curse?

2. Why in most natural resource industries, economic rent is positive, even with free entry.

3. Why the private provision of public good is inefficient? Can the public provision of public good be efficient?

Answer 1

1.

Natural resources are considered a curse, because it has been found by various economists over time, that countries having abundant natural resources tend to have poor economic growth and democracy, as compared to its counterparts having fewer natural resources.

Also known as the economic phenomenon of resource curse, this happens because when a country realizes it has abundant natural resources, it focusses all its attention on mining and production of those resources and neglects the other areas of investment, like health and education, leading to poor economic growth in the long run.

2.

Economic rent is referred to the payment made to use a scarce resource.

In case of natural resources, like land or water, economic rents are positive and high because the resources are scarce in nature and the producer must pay a price for the benefit it is taking out form using the resource and making it less available for future users.

3.

Public goods are those goods which are both non-rival and non-excludable in nature.

Private provision of such goods is not efficient because these goods impose an external cost/benefit on the society by the user, which are not internalized by the private producers. This is because private producers’ main goal is profit maximization and not welfare maximization. This is why these goods can be provided efficiently only by public provision, since it maximizes welfare by internalizing the external cost and benefit from the public good.