Let's share the profit!
2010.09.16. 09:02
Share your profit with the locals in the neighborhood says the government to mining companies in India. Maybe the owners of these companies are not happy about this, maybe they are - but the question is not their happiness. (In this case the happiness of locals is predictible.)
26% mining profit sharing here to stay
Unfazed [undisturbed] by opposition from the mining community, mines minister B K Handique today said the recommendation mandating them to share 26 per cent of their profits was irrevocable, saying the government was committed to ensuring inclusiveness of the people in the mining areas.
Is this fair or not? Is there any rational reason - I mean any reason supperted by economists - to make such a demand on firms? Or is it a simple non sensical idea inspired by political/ideological or cultural values or maneuvers? Don't know what's behind, but I can show you the rational reason to do it. An economic reason.
The key is the exsistence of externalities. The mining companies generate both negative and positive external effects during their production. External effects don't appear in the firm's accounts. These pluses or minuses occur not for them but because of them. They are on others' accounts who are not directly involved in the market. The mining companies produce not only gold, iron or coal but pluses and minuses on the local community too. (About the problems of India's mining industry see this article.)
The WorldBank says:
At a local level, a mine has the potential to significantly benefit the local population through the creation of direct and indirect employment, skills transfer, enhancing the capacity of health and education services, improved infrastructure, and small and medium business opportunities. However, the advent of mining and the inevitable closure of a mine, can also cause significant adverse effects on the local population, infringing on certain rights, and affecting their traditional means to livelihood. This can be manifest in many ways, impacting on land rights and the rights of indigenous people, induced inflation, influx of newcomers to the area, disruption of traditional social structures and social jealousy.
I think the goverment's opinion is clear: the external costs are higher then the external benefits. The result is a reduction of welfare in the local community so you must compensate the locals.
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