Environmental Economics – International Issues (Håkan Eggert/ Mads Greaker)
Lecture 4
Introduction to International Natural Resource use and to
Game Theory
A Russian trawler fled with two Norwegian fisheries
officials on board after they inspected its catch (2005 10
16)
Fishing
Recruitment
Growth
Natural mortality
Usable
Stock
Migratiton
Recruitment,
Harvest (catch)
Migration
Usable
Stock
Growth, Mortality
1
Harvest
Environmental Economics – International Issues (Håkan Eggert/ Mads Greaker)
Lecture 4
Growth
Stock
K
Stock
K
Tid
K = carrying capacity
Static efficient sustained yield (Assumptions:)
1. Fish price constant (small share of market, close
substitutes)
2. Catch per unit of effort (CPUE), e.g., std trawl hour,
proportional to stock size
3. Constant MC for fishing (all costs variable in the long
run, same technology)
€
Total Cost
Total Benefits
Fishing effort
Max
Economic
Yield
Open Access
equilibrium
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Environmental Economics – International Issues (Håkan Eggert/ Mads Greaker)
Lecture 4
Dynamic Approach – optimal catch

x  F ( x)  h(t )
K  x
F ( x)  rx 
 K 
 ( x, h)  ( p  c( x)) h(t )

max PV   et x(t ), h(t )dt
0
H  et  p  c( x)h(t )   (t )F ( x)  h(t )
Current value Hamiltonian, Maximum principle:
 c' ( x) F ( x*) 

p

c
(
x
*)


  F ' ( x)  
social discount rate = growth rate + marginal stock effect
(cheaper to catch 1 kg from high fish density sea)
How address the fishery problem?
i) CPR management
ii) Governmental regulation, e.g., # fishing days/year
iii) Pigouvian tax
iv) ITQ (Individual Transferable Quota)
v) Private property (companies)
vi) Marine reserves
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Environmental Economics – International Issues (Håkan Eggert/ Mads Greaker)
Lecture 4
i) CPR management
Tragedy of the commons (Hardin, 1968) - Governing the
commons (Elinor Ostrom, 1990)
 Common Property Resource Management (CPRM)
Ostroms 8 design principles for sustainable CPRM
Ex.) Alanya, Turkey
i) Clear boundaries – geographically and users
ii) Congruence – users and local conditions
iii) Collective rule design
iv) Monitoring recognized by users
v) Gradual sanctions
vi) Fast, cheap, easily accessed local conflict resolution
arenas (e.g. outside church, local pub)
vii) Recognized by government
viii) If multi levels (e.g. up/down streams villages using a
river for irrigation) i)-vii) between villages
Especially important in developing countries
Argument against private property solutions
ii) Governmental regulation, e.g., # fishing days/year
Regulated open access (48 hours Halibut fishery Canada
– USA)
iii) Pigouvian tax
-Monitoring and Enforcement problems
-Short run response – increasing fishing effort
-Legitimacy problem for the government
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Environmental Economics – International Issues (Håkan Eggert/ Mads Greaker)
Lecture 4
iv) ITQ (Individual Transferable Quota)
3 components/stages in an ITQ regime
a) Annual catch for a speices set by e.g. government
Total Allowable Catch, TAC
b) Percentage shares of TAC distributed gratis based on
historical catch or auctioned to fishers/companies
c) Fishers buy/sell ITQs and then catch the amount they
are entitled to.
In theory high catch/low cost fishers will offer enough
money to make low catch/high cost fishers voluntarily
sell their ITQs. If TAC set correct, resource rent will be
maximized (about MEY).
Discussed critique:
a) High grading If small shrimp are paid €2/kg and big
shrimp earns €12/kg it may be profitable to sort and
discard back into the sea. Often 70-80% of discards die.
b) Multispecies fishery. Joint catch of several species.
Hard to optimize ITQs for all species, profitable to
discard some species.
c) Employment and structure. ITQs reduce number of
employed fishers. No economic argument, but politically
important. Fishing often important in remote areas with
high unemployment. Market orientation → large vessels,
assumed less caring for the environment. Small, artisanal
vessels and gear preferred by many environmental NGOs
v) Private property (companies)
Transaction costs, right to contract, transferability,
enforcement
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Environmental Economics – International Issues (Håkan Eggert/ Mads Greaker)
Lecture 4
vi) Marine reserves
 To protect stock level and age structure
 Limit by-catch of juveniles and other species
 Protect marine biodiversity
 Protect important stages like recruits, juveniles and
spawning
 Protect and improve productivity
 Create benchmark areas for research
 Protect artisanal fishery
 Increas public environmental awareness and support
sustainable use of marine resources
Patchyness. Different productivity in defined areas, flow
between those (sink – source)
Prisoner’s dilemma (PD)
(2 suspects)
Player A
Player B
confess
-3, -3
-6, 0
confess
deny
deny
0, -6
-1, -1
Best strategy for each, irrespective of the others choice,
is to confess. Still, both denying would make them better
off (1 year in prison instead of 3 years)
2 country fishing as PD
(cooperation higher yield
closer to MEY)
A
B
cheat
1, 1
0, 3
cheat
cooperation
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cooperation
3, 0
2, 2
Environmental Economics – International Issues (Håkan Eggert/ Mads Greaker)
Lecture 4
Repeated games and strategic bargaining (Nobel
laureates, Aumann and Schelling, 2005)
Tit for tat
Credible threat
Individual rationality constraint (Convinced that Payoff coop>compet. Pay.)
Trigger strategy in repeated (super) games:
Cooperation until other part cheats, then open access for
the remaining periods, infinite! (Hannesson 1997)
N players, equal cost.
Cooperative:
Each player get 1/N of the total NPV profit (Coop)
Defect:
The Defector gets one period cooperative profit + profit
from fishing down and then open access share for the rest
of time. If this sum > Coop => Defect! If not, selfenforcing equilibrium.
The model then extended, costs differ. Discount rate,
group size and cost differences matter.
Reputation, reciprocity (Nobel laureate Ostrom, 2009;
Ernst Fehr)
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Environmental Economics – International Issues (Håkan Eggert/ Mads Greaker)
Lecture 4
International aspects – Baltic Sea
ITQs traded between countries (Swe, Den, Ger, Pol, Est,
Latv, Lit, Russia)?
Monitoring and Enforcement Compliance
Swedish fishermen accuse Danish and Polish of violating
Swedish fishermen 2nd worst according to Swedish Board
of fisheries
Shared stocks – two or more countries share a stock
Straddling stocks – fish cross boundaries into the high
seas too (open access?)
Political economy of setting TACs
Side payments not to fish?
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Environmental Economics – International Issues (Håkan Eggert/ Mads Greaker)
Lecture 4
Worm et al (Science 2006):
All commercial stocks collapsed by 2048!
Costello et al (Science 2008):
ITQs reduce risk of stock collapse dramatically
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