Economics 101: Using Economics for Management Decisions

1. Brad Gentner Economist Office of Science & Technology Division of Statistics and Economics National Marine Fisheries Service Economics 101: Using Economics for Management Decisions Thanks for the opportunity � by educating the public, better decisions will get made. I want to make it clear that I am not here as an advocate of recreational fishing, but as an advocate of good stewardship and the highest and best use of our marine resources. I will present a case study today and want to make it clear that when manage using economic efficiency as a criteria, recreational interests won�t always prevail. What�s best for society and the resource will prevail though and that is what is important.Thanks for the opportunity � by educating the public, better decisions will get made. I want to make it clear that I am not here as an advocate of recreational fishing, but as an advocate of good stewardship and the highest and best use of our marine resources. I will present a case study today and want to make it clear that when manage using economic efficiency as a criteria, recreational interests won�t always prevail. What�s best for society and the resource will prevail though and that is what is important.

2. Two Broad Economic Measures Economic Value Monetizes the value people place on resources. Is society better or worse off as the result of a policy? Economic Impacts Examines the flow of expenditures through a community. Who wins and who loses as a result of a policy? AKA � benefits, welfare, value a value loss = cost, a value gain = benefit. Or is society a winner or loser overall. This is the relevant question to ask when deciding between two policies (not impacts). Will society be better or worse off due to this policy. Economic impacts, on the other hand, track how policies impact businesses and households, allowing policy makers to decide between two policies with similar benefits or costs. It determines if one group will be affected more financially than another. Give example Ideally, policies should be set to maximize benefits or minimize costs. Once the policy is set, policy makers use economic impacts to determine which businesses win or lose. This will be the first data collection in HI to collect data suitable for analyzing both components of economic importance AKA � benefits, welfare, value a value loss = cost, a value gain = benefit. Or is society a winner or loser overall. This is the relevant question to ask when deciding between two policies (not impacts). Will society be better or worse off due to this policy. Economic impacts, on the other hand, track how policies impact businesses and households, allowing policy makers to decide between two policies with similar benefits or costs. It determines if one group will be affected more financially than another. Give example Ideally, policies should be set to maximize benefits or minimize costs. Once the policy is set, policy makers use economic impacts to determine which businesses win or lose. This will be the first data collection in HI to collect data suitable for analyzing both components of economic importance

3. Economic Value I�ll quickly try to demonstrate both ideas. Demand curve is a mapping of all combinations of price and quantity for a given good. At a particular �Price� a consumer buys �X� number of trips. The shaded area is what you have been willing to pay but did not have to pay; this is value. For businesses, value = profits, so if it helps you, angler value can be thought of individuals profits; what they get to keep versus what they had to spend to take a fishing trip. Benefits (bigger triangle) and costs (shrinking triangle). This is a simplistic example because, in the case of recreational fishing, the profits of those businesses the cater to recreational anglers add to this value. This works great for toothpaste, cereal, anything you can buy in a store. Unfortunately, you cannot buy a trip in a store. So, what is the price of a recreational trip? Travel cost which includes distance traveled, cost of driving your car, income you gave up on your trip, etc. Number of trips taken is the quantity and we can get all this data from the HMRFSI�ll quickly try to demonstrate both ideas. Demand curve is a mapping of all combinations of price and quantity for a given good. At a particular �Price� a consumer buys �X� number of trips. The shaded area is what you have been willing to pay but did not have to pay; this is value. For businesses, value = profits, so if it helps you, angler value can be thought of individuals profits; what they get to keep versus what they had to spend to take a fishing trip. Benefits (bigger triangle) and costs (shrinking triangle). This is a simplistic example because, in the case of recreational fishing, the profits of those businesses the cater to recreational anglers add to this value. This works great for toothpaste, cereal, anything you can buy in a store. Unfortunately, you cannot buy a trip in a store. So, what is the price of a recreational trip? Travel cost which includes distance traveled, cost of driving your car, income you gave up on your trip, etc. Number of trips taken is the quantity and we can get all this data from the HMRFS

4. Economic Impacts Economic impacts are an entirely different animal. Again this is about the distribution of changes in benefits across business in the economy. Economic impacts begin with angler purchases. An angler walks into a store and buys $5.00 worth of doughnuts. This would be the price ($) and quantity from the last slide, but instead of trying to figure out what that angler might have spent in addition to that price, like with value, we examine how that $5 moves through the local economy. Initial expenditure (direct), indirect, and induced impacts. Economic impacts can also be expressed in terms of changes in incomes or employment generated by the purchase. Economic impacts are an entirely different animal. Again this is about the distribution of changes in benefits across business in the economy. Economic impacts begin with angler purchases. An angler walks into a store and buys $5.00 worth of doughnuts. This would be the price ($) and quantity from the last slide, but instead of trying to figure out what that angler might have spent in addition to that price, like with value, we examine how that $5 moves through the local economy. Initial expenditure (direct), indirect, and induced impacts. Economic impacts can also be expressed in terms of changes in incomes or employment generated by the purchase.

5. Why Value and Not Impacts? Impacts don�t measure efficiency Highest and best use Substituting golfing for fishing may generate higher economic impacts, but not higher value Simply measures transfers between sectors Impacts don�t measure consumer surplus Net effect in economic impacts is zero Impossible to tell then which policy is �better� Impacts don�t measure producer surplus

6. Using Economics for Policy Analysis Laws mandate examination of value To do this job, we need Angler demand for trips Angler expenditures Angler behavioral response to policies How do we get that information Expenditure surveys Behavior surveys Catch and effort surveys NEPA, MSRA, EO 12866 Allocation, bag limit, size limit, seasonal closuresNEPA, MSRA, EO 12866 Allocation, bag limit, size limit, seasonal closures

7. Using Economics for Allocation Ideally, the optimum allocation is one that maximizes NET ECONOMIC BENEFITS Not economic impacts Not who has the highest value takes all Recreation side - consumer + producer surplus Anglers willingness to pay for that next fish Charter and head boat profits Commercial side consumer + producer surplus Consumer willingness to pay for fish at the market Commercial harvester and processor profits Rent to labor Don�t forget diminishing marginal returns

8. Equate Marginal Benefits q* is the optimal % for the commercial sector and Q-q* is the recreational share Assuming small profit maxing firms facing perfectly competitive markets for inputs and outputs therefore marginal benefit horizontal (profit function) illustration also works for diminishing returns or downward sloping MB or profit line, which could be the case under open access. Under an ITQ/DAP system, the MB is the quota trade price. Recreational MB is downward sloping recognizing diminishing marginal returnsq* is the optimal % for the commercial sector and Q-q* is the recreational share Assuming small profit maxing firms facing perfectly competitive markets for inputs and outputs therefore marginal benefit horizontal (profit function) illustration also works for diminishing returns or downward sloping MB or profit line, which could be the case under open access. Under an ITQ/DAP system, the MB is the quota trade price. Recreational MB is downward sloping recognizing diminishing marginal returns

9. So What�s Stopping Us? Lack behavioral surveys for all species For allocation, there is a lack of data on the commercial side Very few mandatory data collection programs Includes for-hire recreational industry Lack of understanding of the role in economics in the policy process

10. What Can You Do? Continue to support and participate in recreational data collection efforts This includes the MRFSS Without it, I can�t collect economic data Encourage better data collection for commercial fisheries Increase economic literacy Feel free to send me an email at brad.gentner@noaa.gov with any questions