The Economic Approach to Environmental and Natural Resources, 3e

1. The Economic Approach to Environmental and Natural Resources, 3e By James R. Kahn © 2005 South-Western, part of the Thomson Corporation

2. Renewable Resources and the Environment Part III

3. Fisheries Chapter 11 © 2004 Thomson Learning/South-Western

4. Introduction • Modern fishing technology, coupled with increased demand and open-access exploitation of fisheries, has driven many fish stocks to such low levels that they are threatened with extinction. • As illustrated in Table 11.1, where average annual catch is compared to potential catch, fish populations are declining throughout the world. • The proportion of global fish stocks that are in a state of decline has risen from 10% in 1975 to almost 30% in 2002. • While this number may not sound high, it represents all of the world’s most important fisheries.

6. Introduction • Recreational fishing is also very important in the United States. • According to the U.S. Fish and Wildlife Service, approximately 34 million adult Americans (over age 16) participated in recreational fishing in 2001. • These anglers accounted for 500,000 days of fishing and $35 billion on fishing-related expenses.

7. Fisheries Biology • The reproductive potential of a fish population is a function of both the size of the fish population and the characteristics of its habitat. • Both the growth of the population and the population itself are measured in biomass (weight) units. • Biomass does not distinguish between number of individuals and mass of individuals. • Figure 11.1 depicts a logistic growth function which illustrates the relationship between the fish population and the growth rate of the population. • Initially, there is no growth, then over some range of population (up to X2), population growth is increasing. Beyond X2, the growth of the population is decreasing.

9. Fisheries Biology • The ecosystem's ability to support the fish population is the most significant reason for the changing relationship between population growth and population. • With a low population, the resources will support increasing growth. • As the population grows, there is a growing competition for those resources and the growth in the population slows. • Eventually, the amount of growth falls to zero, which occurs at the maximum population K. • This point is also referred to as the carrying capacity of the environment and is a biological equilibrium.

10. Fisheries Biology • The growth function represented in Figure 11.1 represents a a compensated growth function. • Figure 11.2 contains a depensated growth function, where the growth rate initially increases and then decreases. • Figure 11.3 contains a critically depensated growth function where, X0 represents the minimum viable population. • If population falls below this level, growth becomes negative and population becomes irreversibly headed towards zero. • The implication is that if managers make a mistake and allow too much harvest, they may doom the population to extinction.

13. The Optimal Harvest • In order to determine how harvesting affects a fish population, consider the growth function in Figure 11.4. • Note that C1 represents the level of harvest (harvest and growth are measured on the vertical axis). • When a harvest of C1 units per year is removed from the fishery, the fish population declines because there is no natural growth and harvesting is removing a portion of the population. • Population will continue to fall until natural growth is equal to the harvest, which occurs at X1.

15. The Optimal Harvest • In Figure 11.5 a harvest level of C1 is associated with two equilibrium populations (X1' and X1"). • This means that growth is exactly equal to harvest and the population will remain unchanged at either of these levels. • Cmsy represents the harvest level associated with maximum sustainable yield for the fishery. • This is the only harvest level associated with one equilibrium point.

17. The Optimal Harvest • In the early discussions of fishery management, maximum sustainable yield was the theoretical goal of management policies. • Recent policy targets a more precautionary goal of a population between the carrying capacity and the level associated with maximum sustainable yield.

18. The Gordon Model and Its Evolution • In a 1955 article, H. Scott Gordon made the point that uncontrolled access to fishery resources would result in a greater than optimal level of fishing effort. • Gordon derived a catch function that represented a "bionomic" equilibrium. • This catch function considered the relationship between fishing effort, catch, and fish population. • Gordon’s analysis began by assuming that, holding everything else constant, catch is proportional to the fish population. • Figure 11.6 illustrates a set of yield functions, where each curve represents a different level of fishing effort.

20. The Gordon Model and Its Evolution • By superimposing the equilibrium catch function on the yield functions (Figure 11.7) it is possible to identify the effort and yield function associated with maximum sustainable yield in the fishery. • This is known as the sustainable yield function (Figure 11.8). • Notice the sustainable yield function examines the relationship between effort and catch. • As effort increases, sustainable yield increases and then decreases.

23. The Gordon Model and Its Evolution • A sustainable total revenue function can be derived from a sustainable yield function. • Price is assumed to be constant, based on the additional assumption that catch from that particular population will be small relative to the total market. • Given a constant price, a sustainable total revenue function can be derived simply by rescaling Figure 11.8. • In Figure 11.9, the sustainable total revenue function is labeled TR and an additional curve representing total costs (TC) is also given.

25. The Gordon Model and Its Evolution • Gordon suggests that net economic yield (economic rent) be maximized (identified by MR=MC) so as to maximize social benefits. • Economic rent originates from the productivity of the fish stock, where more fish implies greater catch with less effort (cost). • In Figure 11.9, the optimal effort, that effort which maximizes economic rent, occurs at E2.

26. The Gordon Model and Its Evolution • In an open-access fishery, when economic rent is earned in the fishery, entrance by new firms occurs until economic rent falls to zero, effort level of E1 in Figure 11.9. • The entrance of firms in response to economic rent and the resulting increase in effort to E1 results in AR = MC rather than the optimal effort level of E2 where MR=MC. • Table 11.2 illustrates the relationship between total catch, marginal catch, and average catch.

29. The Gordon Model and Its Evolution • Unlike the behavior of a single firm operator, where the addition to output of an additional unit of input is measured by Marginal Product and compared to Price, within the fishery there is not a single firm operator over the whole fishery. • Each individual fisher compares their average catch and associated revenue with the value of the highest alternative to fishing. • If the highest alternative available is $50 per day, then the fisher will compare average catch (AP) multiplied by Price against the alternative of $50. • The result is that there are a greater number of fishers in the fishery than would be if the decision to enter was based on a comparison of marginal product* Price, rather than average product* Price.

31. The Gordon Model and Its Evolution • The Gordon model is designed to focus on the inefficiency associated with open-access, and the loss in welfare associated with too much effort being employed in the fishery. • Gordon suggests that a monopoly within the fishery would prevent the inefficiency associated with open-access. • Policies based on Gordon’s suggestion of limiting effort within the fishery have been ineffective and brought many world fisheries to the brink of collapse.

32. Shortcomings of the Gordon Model • The primary shortcoming of the Gordon model is that it is static in nature, rather than dynamic. • Clark (1985) shows that as the discount rate gets very large, the dynamically optimal level of catch approaches that associated with open access. • Another shortcoming of the Gordon approach is that it does not consider consumers' and producers' surplus, which may exist and be important in many fisheries, particularly for some threatened fisheries such as salmon, redfish, and Alaskan King Crab. • In an attempt to incorporate consumers' and producers' surplus into a model of the fishery, conventional demand and supply models are integrated into the fishery model (Figure 11.11). The horizontal axis is no longer measured in terms of effort, but in units of catch.

34. Incorporating Consumers’ and Producers’ Surplus in Fishery Models • Figure 11.12 illustrates a family of supply functions, each defined for a different level of the fish stock. • There are multiple equilibria, each associated with a different supply and demand interaction. • However, for each level of population represented, there is only one sustainable level of catch. • Figure 11.13 identifies the six sustainable catch levels, each associated with a different supply function. • These catch values are then identified on the supply curves in Figure 11.14. For example, the equilibrium catch associated with a population of F1 is zero, which is identified as point A on Supply function SF1.

36. Incorporating Consumers’ and Producers’ Surplus in Fishery Models • Figure 11.15 illustrates the bioeconomic equilibrium. • It considers the intersection between demand, a supply function and the biological equilibrium represented by a third backward bending curve. • At the intersection of these three curves, there are two possible levels of catch. • A sole owner of a fishery could locate at point F, which is associated with a higher fish stock. • At point F, economic rent is equal to the area PEFB, consumers' surplus is the area PDE, and producers' surplus is the area BFA. • At point E there would be no economic rent. This is consistent with an open-access fishery. • The objective of fishery management would be to choose a point along the sustainable catch curve that maximizes the sum of economic rent and consumer and producer surplus.

38. Incorporating Consumers’ and Producers’ Surplus in Fishery Models • It is also possible to use this model to examine other types of fishery management problems. • An example would be modeling the fishery-related damages from the pollution in the Chesapeake Bay. • Since the Chesapeake Bay is the major spawning area for striped bass along the Mid-Atlantic and North Atlantic coast, a downward sloping demand curve is appropriate. • Evidence suggests that there are strong locational advantages across potential fishing sites. • This translates into an increasing marginal cost function associated with catching striped bass. • The impact of pollution may be to decrease the carrying capacity of the environment. • The result is that the locus of points that illustrate the biological equilibrium associated with different supply functions has shifted inward (Figure 11.7).

40. Current Fishery Policy • This section will focus on two approaches to policy as defined by Anderson (1986). • Those policies that can actually address the issue of entry are termed "limited-entry" techniques. • All other regulations or policies that do not explicitly address the problem of entry are termed “open-access" techniques. • Open-access techniques modify fishing behavior of those participants in the fishery without directly affecting participation in the fishery. • They typically raise the cost associated with fishing.

41. Current Fishery Policy • Open-access regulations are designed to maintain the stocks at some target level, usually stocks consistent with maximum sustainable yield. • These regulations generally take the form of restrictions on how fish may be caught, which fish may be caught, and where fish may be caught. • Because modern technology can give a fishing fleet tremendous fishing power relative to the size of a fish population, open-access regulation generally forces inefficiency on the fishers. • For example, in Maryland's share of the Chesapeake, it is illegal to dredge for oysters under motorized power. This means sails, smaller dredging equipment, and slower movement across the oyster beds.

42. Current Fishery Policy • Regulation which revolves around restrictions on the minimum size of fish that are legal to harvest are designed to leave a portion of the fish stock in the water to provide a sufficient breeding stock to ensure future populations. • Fishers generally implement this restriction by choosing a mesh size for their nets that allows smaller, illegal fish, to escape. • Because fishing activity may disrupt the spawning process, often the fishing season is closed for a certain period on an annual basis, generally during spawning season. • Also, some species become so extremely congregated during spawning that fishing effort could capture virtually the entire population.

43. Current Fishing Policy • Regulations on where fish may be caught are designed to protect fish stocks when they are congregated and vulnerable to overharvesting. • These types of regulations also protect vulnerable fishing habitats from destruction by the fishing process. • Often, open-access regulations take the form of limits on how many fish may be captured in a given time period. • These limits may be in the form of weight caught, number of fish, or volume of catch. • The catch limit on giant bluefin tuna is 1 fish per boat. A fish can often weigh as much as 1000 pounds and the market price has been $18 per pound.

44. Economic Analysis of Open-Access Regulations • The effect of open-access regulation falls into one of two categories: an increase in cost due to regulations or a possible decrease in cost due to higher catch per effort expended. • It should be noted that in the process of raising costs to protect the stock of fish, the open-access regulations can exacerbate the problem of too many resources being devoted to the fishery. • Table 11.3 summarizes the impact of the open-access regulations on key variables in the fishery.

45. Economic Analysis of Open-Access Regulations

46. Aquaculture • Aquaculture, the cultivation of fish in artificial environments or in contained natural environments, is often suggested as a means of dealing with the open-access problem. • Not all species can be cultivated. • Shellfish are ideal because of their inherent immobility. • Wildfish will only benefit indirectly from aquaculture if the "farmed" species usurps part of the market demand for the wildfish and therefore reduces the fishing pressure on the species. • Aquaculture creates its own set of problems. • Communities and industries that are based on wild fisheries could suffer economic setbacks from the decline in demand for wild fish (as consumers choose aquaculture).

47. Aquaculture • Aquaculture can severely damage the environment. • Shrimp aquaculture in Central and South America has resulted in a loss of mangrove forests, excess nutrient loading into estuaries and severely reduced dissolved oxygen in areas bordering estuaries. • There are also potential problems associated with hybridized fish escaping and damaging the gene pool of existing species.

48. Limited Entry Techniques • Limited entry techniques raise the cost for fishers without increasing social costs. • If limited entry techniques are truly analogous to economic incentives for pollution control, then they should be available either as price policies or quantity policies. • Fisheries economics literature tends to focus on permit-based systems. • The name for these systems is individual transferable quotas (ITQs).

49. Limited Entry Techniques • Individual transferable quotas (ITQs) would work in a fashion similar to marketable pollution permits. • By limiting the number of catch quota which are issued, bidding for the quotas will occur until the price of the quota is exactly equal to the divergence between average cost and price (average rent). • Limited entry techniques structured to direct effort rather than catch can also be developed. • Here only a fixed number of boats would be allowed to operate in the fishery. • The method of permit allocation could be by auction or historical presence in the fishery.

50. Limited Entry Techniques • If these ITQs are transferable, it will be possible to have only the most efficient fisherman in the fishery. • Enforcement of effort-based limits, that is vessel permits, would be much easier than that associated with the catch limits. • No measuring or weighing is necessary; a poster sized certificate of operation would allow easy identification of legal vessels. • Catch-based ITQs are subject to several problems. • People might cheat on their quota by selling to foreign vessels or in an underground market. • Another problem is associated with the differing market values of different size fish.