[h=1]India Auctions First Gold Mine: Exactly The Right Way To Do It[/h]
India has just conducted its first auction of a gold mine: this is exactly the right way to allocate the exploration and exploitation rights of such a natural resource. This is another one of those steps along the road to India becoming the much wealthier country it should be. The basic economics behind this being twofold: firstly, that we want whatever productive resources we have to be in the hands of those most efficient at exploiting them. Secondly, there’s no reason why private economic actors should profit purely from the existence of some natural resource. From their skill at exploiting it, most certainly so, but not just from the mere and simple existence of the resource.
The correct answer to the existence of such resources is thus that they should be auctioned off by the government. And that’s just what India has just done: this is an action to be applauded. It’s also, on a more minor level, one of those areas where economics has been most instructive in recent decades. For great attention has been paid to and great advances made in auction design so as to maximise the efficiency of the process.
The basic news is here:
However, this isn’t enough: because of course it’s entirely possible that a government would allocate such resources, and their profit possibilities, to friends or relatives of those who constitute that government. I can think of at least one African country where the mobile telephone spectrum was granted to the daughter of the ruling President: whether on a fully competitive price or not is as yet not quite determined. So, the correct process is to have an open auction of access to those resources.
Our third point is again economic rather than political. Which is that we absolutely want people to make a profit out of the technology they have developed to exploit these resources: we also want them to profit from the application of their capital. Those who have the best technology, those who have the cheapest access to capital, will (likely be at least) be those who are willing to offer the highest price for access to those resources. Thus our auction, to discover who is willing to pay that highest price. Auction economics has been stating these truths since about the 1980s and this structure has been most effectively deployed around the world for mineral resources, that mobile telecoms spectrum and so on. It’s simply the right way to deal with these matters.
Finally, we have one more piece of economics: such auctions, such tax take from them, make no difference at all to consumer prices. Here, because a gold miner is a price taker: there is no gold producer out there which can determine its own prices. What they can sell at is determined by the global gold price. Thus any royalty being paid is simply a transfer from the shareholders, from their profits, to the state and thus the people. When there is no such entirely free market we still assume that corporations are profit maximisers. They thus are already charging what the market will bear. Their costs don’t make any difference to this price: thus again royalties for the resource are simply a transfer from shareholders to the people.
The bottom line here is that India is doing exactly what it should be doing with natural resource deposits. They should indeed be auctioned to the highest bidder on a royalty basis. That way we get the most efficient producers exploiting the deposit and also capture for the people the happenstance of that simple existence of the resource, while also rewarding the exploitation and technology used to facilitate the exploitation of the resource itself.
http://www.forbes.com/sites/timwors...rst-gold-mine-exactly-the-right-way-to-do-it/
India has just conducted its first auction of a gold mine: this is exactly the right way to allocate the exploration and exploitation rights of such a natural resource. This is another one of those steps along the road to India becoming the much wealthier country it should be. The basic economics behind this being twofold: firstly, that we want whatever productive resources we have to be in the hands of those most efficient at exploiting them. Secondly, there’s no reason why private economic actors should profit purely from the existence of some natural resource. From their skill at exploiting it, most certainly so, but not just from the mere and simple existence of the resource.
The correct answer to the existence of such resources is thus that they should be auctioned off by the government. And that’s just what India has just done: this is an action to be applauded. It’s also, on a more minor level, one of those areas where economics has been most instructive in recent decades. For great attention has been paid to and great advances made in auction design so as to maximise the efficiency of the process.
The basic news is here:
In the first ever auction of a gold mine in India, Vedanta Resources has won the right to mine for gold in the Baghmara mines in Chhattisgarh, put up for auction by the state government. Officials informed that of over 160 bids received by the state government, the company offered the highest, in a process that lasted over twelve hours on February 26.
This is the first gold mine so auctioned. But the same process is also taking place with other such natural resources:
On February 18, auction of mining lease was granted for Karhi Chandi limestone block in Baloda Bazaar and on February 19, Kesla limestone block in Raipur district. Karhi Chandi limestone block also earned the distinction of becoming the first non-coal mining lease to be auctioned in India. Baghmara gold mine also saw aggressive bidding.
This is the way these matters should be handled. Our first point is something stemming from David Ricardo those couple of centuries ago (next year marks the second centenary of his publication). Natural resources simply exist, ab initio. There is therefore no particular reason why any single private actor in the economy should benefit from that mere happenstance of nature (or, if you prefer, blessing of God’s bounty). A better manner of dealing with this is to insist that the resources themselves belong to the people, with the government as their proxy. Any revenues raised from leases or royalty payments can be used to reduce the other taxes the population must pay for the government they desire.
However, this isn’t enough: because of course it’s entirely possible that a government would allocate such resources, and their profit possibilities, to friends or relatives of those who constitute that government. I can think of at least one African country where the mobile telephone spectrum was granted to the daughter of the ruling President: whether on a fully competitive price or not is as yet not quite determined. So, the correct process is to have an open auction of access to those resources.
Our third point is again economic rather than political. Which is that we absolutely want people to make a profit out of the technology they have developed to exploit these resources: we also want them to profit from the application of their capital. Those who have the best technology, those who have the cheapest access to capital, will (likely be at least) be those who are willing to offer the highest price for access to those resources. Thus our auction, to discover who is willing to pay that highest price. Auction economics has been stating these truths since about the 1980s and this structure has been most effectively deployed around the world for mineral resources, that mobile telecoms spectrum and so on. It’s simply the right way to deal with these matters.
Finally, we have one more piece of economics: such auctions, such tax take from them, make no difference at all to consumer prices. Here, because a gold miner is a price taker: there is no gold producer out there which can determine its own prices. What they can sell at is determined by the global gold price. Thus any royalty being paid is simply a transfer from the shareholders, from their profits, to the state and thus the people. When there is no such entirely free market we still assume that corporations are profit maximisers. They thus are already charging what the market will bear. Their costs don’t make any difference to this price: thus again royalties for the resource are simply a transfer from shareholders to the people.
The bottom line here is that India is doing exactly what it should be doing with natural resource deposits. They should indeed be auctioned to the highest bidder on a royalty basis. That way we get the most efficient producers exploiting the deposit and also capture for the people the happenstance of that simple existence of the resource, while also rewarding the exploitation and technology used to facilitate the exploitation of the resource itself.
http://www.forbes.com/sites/timwors...rst-gold-mine-exactly-the-right-way-to-do-it/
