Fisheries: The steady-state model 4/16/2017 Fisheries: The steady-state model Richard T. Woodward Department of Agricultural Economics Texas A&M University r-woodward@tamu.edu Phone: 979-845-5864

What is an open-access good and why does it lead to inefficiencies? 4/16/2017 What is an open-access good and why does it lead to inefficiencies? An open access resource is a limited resource that appears to each individual to be limitless. Individuals use the resource without taking into account the effect that their use has on others. Which property right characteristic fails? Conrad defines a Bioeconmic model: as “one that seeks to maximize some measure of economic value, sugbject to resource dynamics.” Too narrow.

A full day’s work for an Indian fisherman 4/16/2017 A full day’s work for an Indian fisherman

Growth in the Fish Stock (tons) 4/16/2017 Growth in the Fish Stock (tons) As there are more fish in the water, reproduction rates go up, causing the population to grow. Eventually however, due to crowding effects and competition for food, the growth rates decline. At the far right point, the carrying capacity of the fishery is reached and the stock is in equilibrium. Fish Stock (tons)

4/16/2017 Growth in the Fish Stock (tons) Starting at a low level (the green dot) fish reproduce in the first period Fish Stock (tons)

4/16/2017 Growth in the Fish Stock (tons) This leads to growth so that in the second period the stock has increased Fish Stock (tons)

Again, reproduction and growth occur 4/16/2017 Growth in the Fish Stock (tons) Again, reproduction and growth occur Fish Stock (tons)

4/16/2017 Growth in the Fish Stock (tons) This process continues until the carrying capacity of the fishery is reached Fish Stock (tons)

This is the natural equilibrium for the fishery. 4/16/2017 Growth in the Fish Stock (tons) Natural Equilibrium This is the natural equilibrium for the fishery. Fish Stock (tons)

4/16/2017 a. Suppose there are no fishermen in the lake and the lake's initial stock is one ton. Approximately what would be the stock in each of the next 5 years? b. Approximately what would be the stock after 100 years (i.e., what is the biological equilibrium)?

4/16/2017 When fishing begins, the growth is taken out (harvested) instead of adding to the stock in the next period Growth in the Fish Stock (tons) When fishers begin to harvest, part or all of the growth that occurs in any period is taken out (harvested) so that growth in the stock doesn’t take place or is reduced. Sustainable yield (Y(E0)) Fish Stock (tons)

4/16/2017 Growth in the Fish Stock (tons) More effort Greater levels of effort will push the stock to lower levels. Initially this will lead to increased sustainable harvests because we’re farther away from the carrying capacity Y(E1) Y(E0) Fish Stock (tons)

Medium effort level  high harvests 4/16/2017 Growth in the Fish Stock (tons) Medium effort level  high harvests High effort level  low harvests Low effort level  low harvests Eventually, however, increased effort doesn’t pay off because the increased number of fishers are chasing fewer fish. At high effort levels the fish that can be harvested sustainably is as low as the level that could be harvested with a greater fish stock and less effort. Y(E3) Y(E2) Y(E1) Y(E0) Y(E4) Fish Stock (tons)

Approximately what would the stock be after 4 years? 4/16/2017 Now assume that one boat comes into the fishery after it has reached its biological equilibrium. This boat can, in any given year, harvest 40% of the stock. What would be the stock after harvests and growth next year (assume harvests and growth take place simultaneously). Approximately what would the stock be after 4 years?

2 boats can harvest 60% of the stock. 4/16/2017 2 boats can harvest 60% of the stock. 3 boats can harvest 70% of the stock. Approximately what would the stock be after 4 years?

Maximum Sustainable Yield (MSY) 4/16/2017 Maximum Sustainable Yield (MSY) Sustainable Harvests (tons) We see therefore, that as effort increases (moving from right to left in the previous figure) at first increases sustainable harvests, but then leads to a decline. Quantity of Fishing Effort

Sustainable Revenue ($’s) 4/16/2017 Sustainable Revenue ($’s) Revenue If we convert harvests into $’s, the relationship between fishing effort and sustainable revenues looks like this Quantity of Fishing Effort

Benefits and Costs of Fishing Effort ($’s) Costs Revenue 4/16/2017 Benefits and Costs of Fishing Effort ($’s) Costs Revenue Effort, however, costs money. You have to pay for fuel, wages, etc. Here we assume that the marginal cost of effort is constant so that, for example, increasing effort by 50% will increase costs by exactly 50%. Quantity of Fishing Effort

Sustainable Resource Rents 4/16/2017 Benefits and Costs of Fishing Effort ($’s) Costs Sustainable Resource Rents Revenue The sustainable profits that can be obtained for any particular level of fishing effort, therefore, is the difference between the revenues and the costs. These are resource rents since they are the profits that are generated by the resource. Quantity of Fishing Effort

Costs Benefits and Costs of Fishing Effort ($’s) MR = MC R(Ee) Rents 4/16/2017 Costs Benefits and Costs of Fishing Effort ($’s) MR = MC R(Ee) Rents C(Ee) Revenue When the distance between the two curves is maximized, the maximum economic yield is reached. Rents are maximized when the slope of the sustainable revenue curve is equal to the slope of the cost curve, this is our familiar marginal cost = marginal benefit result. Ee Quantity of Fishing Effort

4/16/2017 Rent elimination in an Open Access Fishery (a.k.a The Tragedy of the Commons) Costs Benefits and Costs of Fishing Effort ($’s) Revenue The problem with fisheries is that there is usually no reason that fishers will stop increasing their effort when the rents are maximized. Instead, seeing that other fishers are making money, more boats will enter the fishery, pushing effort beyond E*. This process will continue until all the rents have been eliminated. This is called the open-access equilibrium. The phenomenon is known as the Tragedy of the commons, although as we will discuss later, this is a misnomer. Ee Eo Quantity of Fishing Effort

Costs Benefits and Costs of Fishing Effort ($’s) Rents Revenue 4/16/2017 Costs Benefits and Costs of Fishing Effort ($’s) Rents Revenue In summary, there are three points of interest: E*, where rents are maximized; Em where yield is maximized (maximum sustainable yield) and Eo, the open-access equilibrium Ee Em Eo Quantity of Fishing Effort

4/16/2017 Example

The Gulf of Nicoya, Costa Rica 4/16/2017 The phenomenon of the Tragedy of the commons is demonstrated in the case of a fishery in Costa Rica in the Gulf of Nicoya

4/16/2017 This figure shows the sustainable revenue curve for the fishery. Rents were maximized in about 1980, but effort continued to expand. By 1988 all rents were completely eliminated.

Solutions to the “Tragedy of the Commons” 4/16/2017 Solutions to the “Tragedy of the Commons” Limiting the season or otherwise making fishing more difficult (e.g., unreasonable restrictions on equipment or very short open seasons)

Inefficiently high Costs 4/16/2017 Inefficiently high Costs Benefits and Costs of Fishing Effort ($’s) Efficient Costs Waste Revenue Using policies that simply make fishing more difficult can lead to a lower level of effort, but profits are spent up in wasteful methods. Hence, while from a biological perspective this looks better, from an economic perspective it’s just as bad as the old open-access equilibrium Em Ec Quantity of Fishing Effort

4/16/2017 In the salmon fishery off Alaska’s coast fishermen work like crazy for the one day that the season is open. Anderson: “In the North Pacific halibut fishery, which has been regulated by closed seasons. The fleet has grown such that fishing is restricted to several twenty-four hour periods per year. The result is a hectic race which results in a waste of fish, high processing and storage costs, and frequent injury or death for the fishermen.”

Solutions to the “Tragedy of the Commons” 4/16/2017 Solutions to the “Tragedy of the Commons” Limiting the season or otherwise making fishing more difficult Taxing effort

Benefits and Costs of Fishing Effort ($’s) Costs after Tax Costs 4/16/2017 Benefits and Costs of Fishing Effort ($’s) Costs after Tax Costs Tax Revenue Revenue A second option is to tax effort so that fishermen do not pay just the direct costs but the cost plus the tax. This can lead to the efficient level. What happens to the profits? They go to the taxpayers, i.e. the public. This may not be such a bad solution since the fishery generated rents because of a public resource to start out with. Rettig: Taxes are regularly used to raise mone, infrequently used to manage the fishery. Government subsideies tend to make the problem worse, not better Ee Em Ec Quantity of Fishing Effort

Solutions to the “Tragedy of the Commons” 4/16/2017 Solutions to the “Tragedy of the Commons” Limiting the season or otherwise making fishing more difficult Taxing effort Establishing common ownership over the fishery (fishery cooperatives, 200 mile limit) Individual transferable quotas

Effort level determine by the group or otherwise limited Quantity of 4/16/2017 Costs Benefits and Costs of Fishing Effort ($’s) Rents Revenue Another option is to establish common ownership over the resourceso that the fishers use the resource efficiently. Two methods are commonly employed, fishing cooperatives and transferable quotas. We’ll discuss this second option in much more detail in the next session. - Nationalization of stocks Mention EEZ - International agreements for migratory species community-based systems of overcoming the Tragedy Japan, Maine Lobster fisheries The tragedy is definitely not of commons but of open access resources Licensing is critical 1st step Effort level determine by the group or otherwise limited Quantity of Fishing Effort Ee

Why is Fisheries Management so Difficult? 4/16/2017 Why is Fisheries Management so Difficult? Uncertainty (People don’t trust other people’s estimates) Politics Enforcement The simple models don’t describe a complex world Bycatch Despite the relativel simplicity of the models above, fisheries management is really difficult.

4/16/2017 The Problem of Bycatch One important problem is what is called bycatch. Here we see a harvest of shrimp and behind the bycatch of other species that also we’re caught. This is a very important issue in Texas.

World Fish Utilization 4/16/2017 World Fish Utilization World consumption of fish has been rising. What can we predict for the future?

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Summary Biological growth and biological equilibrium 4/16/2017 Summary Biological growth and biological equilibrium MSY, MEY, and open-access equilibrium Open access  Common property Efficient policies: taxation, establishing ownership over the resource, ITQ’s Inefficient policies: making life difficult for fishermen Fisheries management is difficult, complicated and important!