Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 1 - Part I - Ten Principles of Economics - Problems and Applications: 9

Answer

Corrupt police and court systems mean property is not protected so investors will invest less in these countries. Police and court systems ensure that property rights are protected which creates a greater incentive to do business as any profits or assets are safe. This lack of investment means that standards of living will be lower because economic prosperity is low.

Work Step by Step

Suppose you are an investor looking to open a grocery store. You look at two possible markets: Town A and Town B. Town A has a responsive police force and fair court systems. Town B has a strong gang presence and corrupt police and court systems with a large amount of bribery. You will choose Town A as an investment of capital in Town B is not safe. Your store is more likely to be robbed by gangsters, and nothing may be done as the police and court are more likely to be corrupted by the strong gang presence. Town A gets your investment, growing their economy and raising standards of living.
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