Lecture Notes for Economics 435: Economics of Resources
Prepared by Gunnar Knapp, Professor of Economics
January 30, 2001
FISHERIES ECONOMICS
Special Characteristics of Fisheries Resources
Fisheries economics presents a number of special issues that derive from certain special
characteristics of fisheries resources. It is useful to keep these special characteristics in mind:
Mobility. Fish don't stay in one place--they move around. Unlike cattle, you can't fence them in
(unless you become a fish farmer). And unlike cattle, there isn't any practical way to "brand"
them to show whose fish they are. Mobility is one reason why "property rights" to fisheries are
less common than for other resources. This is also one reason why allocation issues arise
frequently for fisheries resources, including:
Allocation disputes between individuals
Allocation disputes between types of users (commercial fishermen, sport fishermen)
Allocation disputes between regions (Kodiak vs. Cook Inlet, False Pass vs. Yukon)
Allocation disputes between countries (Canada vs US, high seas fisheries)
Hard to see. Fish live under the water. Unlike cattle or trees, it's hard to tell how many there
are, or where they are. This adds a variety of practical difficulties to the management of
fisheries.
Renewable. Exploitation of fisheries resources in one period affects how many fish there are,
and how many can be harvested--in future periods. This makes fisheries management a dynamic
rather than a static problem.
Highly varied and poorly understood biology. Fish have complicated life cycles. There are
hundreds of different species of commercially exploited fish, which differ greatly from each
other. Harvests of one fish species affect the abundance of other fish species, both directly (as a
result of bycatch) and indirectly (through predator-prey relationships among fisheries).
Dependence on ecosystem. Fish are highly affected not only by how we use our fisheries but
also by how we use our other resources:
Whether we build dams on our rivers
Whether we harvest the trees along the rivers
Whether we pollute our waters
Thus the economics of our fisheries are directly tied to the economics of other resources.
Fish are food; fish are alive. For these two reasons, people tend to be more emotional about
fisheries issues than they are about many other resources. People are less likely to think in
Economics of Resources Lecture Notes: Fisheries Economics, page 1
abstract or "objective" terms about fisheries, and are less amenable to applying traditional
economic analysis to fisheries issues.
Tradition of open access. Different legal and cultural customs have arisen over the centuries
with regard to fisheries than for most western resources. In particular, in America there is a
tradition of open or equal access to fisheries. This is embodied in the Alaska Constitution, which
states (in Section 3):
"Wherever occurring in their natural state, fish, wildlife and waters are reserved to the
people for common use."
Maximum Physical Yield vs. Maximum Economic Yield
From an economist's perspective, many of the problems in fisheries management result from the
traditional definition and public perception of fishery management objectives in purely physical
(biological) terms. Most fisheries managers' training and background is in biology. These
managers tend to view the object of fisheries management is to produce the highest possible
sustained yield of fish over time. Economists argue that this goal is no more sensible than saying
that the goal of agriculture is to produce the most possible food or that the goal of car
manufacturers is to produce the greatest number of cars possible or that the goal of foresters is to
produce the most possible wood.
It may be that these goals sound reasonable to you. If so, consider: we could produce more food
if we worked twice as many hours picking all the weeds out by hand and if we used ten times as
much fertilizer. But it wouldn't pay to do this. A farmer would rather produce a little less food
and save a lot of costs. We could cut our timber later and end up producing more wood on
average. But most forest owners would rather have a little bit less timber and more present
value. We could produce more cars if we paid our workers overtime and built more factories-but the diminishing marginal returns might not make it worth the cost.
The point is that maximum physical yield is not necessarily a good criterion for management of a
resource or for production of an output. Instead, net economic yield--total benefits minus total
costs--is what most economists would recommend. Another term for this is economic rent.
A Simple Stock-Catch Equilibrium Model
of a Fishery
We may use a simple model to illustrate several basic concepts in fishery economics. This is a
simple stock-catch equilibrium model of a fishery. We use the model to examine what level of
fish harvests is optimal, assuming we wish to be able to sustain this level of harvest indefinitely
and that we wish the total stock of fish to be constant as well. The model takes into account the
fact that any given stock of fish can only sustain one level of harvest indefinitely if neither the
stock nor the level of harvest are to change.
Figure 1 illustrates the basic biological relationship underlying our model: the relationship
between the total stock of fish and the annual net increase in the stock. Below stock s there are
too few fish to reproduce effectively, and net growth is negative--that is, the population dies out.
Economics of Resources Lecture Notes: Fisheries Economics, page 2
Above stock S there are enough fish to reproduce, and net growth is positive: the stock increases
each year. If left undisturbed, the stock would increase to level S, at which point natural attrition
would balance reproduction each year. S is, thus, the stable equilibrium fish stock.
net
growth
Figure 1
Ro'
stable
equilibrium
unstable
equilibrium
Stock
S
S'
S
For any given fish stock, the more labor (and other inputs) we apply, the more fish we could
catch. This is illustrated in Figure 2.
Catch
Figure 2: Fish Catch as a Function of Stock, for a
Given Level of Labor Inputs
Stock
Also, the greater the stock, the easier it is to catch fish. For a given amount of labor, the greater
the stock, the more fish we could catch. This is illustrated in Figure 3. This simply means that
the catch in any year is an increasing function of both labor and stock.
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Catch
Figure 3: Fish Catch as a Function of Labor
Inputs, for a Given Stock Level
Labor inputs
We will now investigate a steady-state model of annual catch. That is, we assume in the model
that just enough fish are caught each year so that the stock stays constant (which means that the
cost of catching this number of fish stays constant from year to year). We are interested in
discovering how many fish should be caught each year, and what the stock level should be.
If the stock level is to stay constant (a requirement for a steady-state model), then the annual
catch can only be equal to the net increase which would occur in the absence of fishing, which
was illustrated in Figure 1. For each level of stock, we could remove just this many fish, and the
stock would stay constant.
Thus, the maximum sustainable annual harvest would be a harvest of Ro, which could be
sustained if the stock were kept at S'.
What would it cost to catch the sustainable harvest (net growth) for each stock level? This is
illustrated in Figure 4. At stock S, the sustainable catch would be zero since net growth is zero.
Therefore, the cost would also be zero. At stocks less than S, as catches rise, the cost of catching
the fish would also rise, as indicated by the bold dotted curve. However, the cost per unit of
catch rises as the stock declines, so that the cost of catching the fish becomes an increasingly
higher share of the value of the fish.
The economic rent is the difference between the value of sustainable yield and the cost of
catching the sustainable yield. This economic rent is maximized at a stock of S* and a
sustainable catch of R*.
Economics of Resources Lecture Notes: Fisheries Economics, page 4
R* = annual harvest
at which economic
rent is maximized
Figure 4
Cost of catching net
sustainable yield
net
growth
Value of net
sustainable yield
R*
maximum
economic
rent
Stock
S
S**
So'
S'
S*'
S
Note that it will never pay to have stocks be at the level for which sustainable yield is maximized
(S'). This is because increasing the value of the catch to this level by reducing stocks will always
increase costs (because the stock is lower) while the marginal benefit (extra value) received at the
maximum sustained yield possible will be zero.
Economics Carried to Extremes:
Arguments for the Extinction of a Species
Using economic reasoning, it is possible to argue that in some circumstances sustained yield over
time may not be the optimal path of exploitation of a fisheries resource. As an extreme example,
it might be economically "optimal" to fish a species to extinction by harvesting the entire stock
immediately. It is useful to review the reasoning behind this startling conclusion, even though
one can easily find numerous economic (not to mention philosophical) grounds on which to
argue against the extinction of species.
If we consider the economic value of fish harvests to be the only value received from a species,
then extinction (hiring the entire stock immediately) is optimal if the present value of all future
harvests which could be obtained by managing on a renewable basis is less than the value of the
current fish stocks if they were all harvested immediately. If a fish stock reproduces very slowly,
the present value of future growth may be less than the value of the entire stock harvested now.
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In other words, sometimes it may pay to "kill the golden goose." If the golden goose weighs 100
pounds but only lays a one pound egg every ten years, the 100 pounds of gold are providing a rate
of return of only 1/10 of 1 percent (assuming a fixed price of gold). It might be better to take the
100 pounds of gold and invest it somewhere else other than in laying golden eggs, in order to
earn a higher rate of return.
For reassurance, we may remind ourselves of various counter-arguments to this line of reasoning.
First, the future reproduction of a species may be more reliable than other investments, even if it
appears to provide a lower rate of return. Second, the price of the species may rise in the future,
making up for a low rate of natural reproduction. Third, the species may in the future provide
unanticipated but valuable benefits. Fourth, the species may have unknown but critical role in
the ecological system, with indirect but substantial economic benefits. Finally, society may
derive significant non-market value from the existence of the species, whether or not we derive
economic use from it.
FISHERIES MANAGEMENT SYSTEMS
Traditionally, most fisheries have been managed as common property or open access fisheries.
This can lead to a variety of biological and economic problems. A variety of fishery
management systems have been instituted to address these problems. There are advantages and
disadvantages to each system.
Open Access Management Without Harvest Restrictions
If there is no management of a fishery--open access with no restrictions on harvesting--this can
lead to over-fishing, and in the extreme, to extinction of a species. In economic terms, the basic
problem with absence of management is that what is in an individual fisherman’s self-interest
differs from what is in society’s interest. It is in an individual fisherman’s self-interest to fish
beyond a sustainable harvest level, if he knows that other fishermen will harvest the fish anyway
if he doesn’t. This situation is sometimes referred to as the “tragedy of the commons.”
Open Access Management With Harvest Restrictions
Over-fishing can be prevented through regulation of total harvests, usually by setting an annual
harvest quota for the fishery. This is typically the first management measure introduced for most
fisheries. A common way of limiting the harvest to the quota is to limit the season. When the
quota is achieved, the season is closed.
However, rent dissipation can occur even without overfishing of fish stocks, and even if an
effective quota is in place. In other words, even without over-fishing, there can still be an
economic “tragedy of the commons.”
With open access to the fisheries, excess capital stock tends to build up in the fishing fleet. As
long as economic rents can be earned, people have an incentive to add boats and gear to the fleet.
More boats and gear are added than are needed to catch the available stocks efficiently. As the
fleet builds up, different boats interfere with each other, thus reducing efficiency. In addition,
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boats feel compelled to "race" each other to catch the highest possible share of the limited quota.
This further reduces efficiency because fishing occurs when people are tired or when conditions
are not safe for fishing.
The fact of rent dissipation eventually becomes evident as fishermen realize that they are not
making any money. This is possible even if the fish stocks are healthy.
Possible Solutions to Rent Dissipation in Open-Entry Fisheries
Limit vessel efficiency
Examples of efficiency limitation are boat size and gear restrictions. A classic example is the
prohibition of motors on Bristol Bay salmon fishing vessels in the 1950's, so that fishing had to
be done from sailboats. More common examples include vessel length restrictions, net size
restrictions, restrictions on the number of pots which may be carried or fished, and trip limits or
daily harvest limits.:
Advantages:
•
Can be easy to establish.
•
Can be simple to enforce.
•
Tend to work to the benefit of small operators.
•
Tend to increase employment, relative to use of capital.
Disadvantages:
•
Gear restrictions don’t end dissipation of economic rent. Gear restrictions increase costs. At
worst, they can make a fishery unable to compete economically.
•
Tend to discriminate against larger vessel owners or fishermen based farther from the fishing
grounds.
•
Can lead to perverse types of gear, as fishermen seek to find ways to get around the
restrictions--for example, the very wide boats used in Bristol Bay.
Issue a restricted number of licenses to participate in the fishery
(Limited Entry System)
Under this system, the regulators distribute a limited number of permits to participate in the
fishery. These permits may be bought and sold (this is the current management system in the
Alaska salmon fisheries).
Advantages:
Economics of Resources Lecture Notes: Fisheries Economics, page 7
•
Restricts over-capitalization due to too many boats
•
Easy to enforce
Disadvantages:
•
Doesn't restrict over-capitalization due to improvements in technology or catching efficiency
per boat (capital stuffing)
•
If marketable permits are given out, the capitalized values of all future economic rents goes to
the people to whom they are initially distributed. Fisheries economist Parzival Copes has
referred to this problem as the transitional gains trap--only the transitional generation
benefits from the institution of the policy. If non-marketable permits are given out, you run
the risk that they will not be held by the most efficient fishermen. If temporary permits are
given out, it is hard for fishermen to plan from year to year. If the permits are auctioned to
the highest bidder, either one time only or on an annual bidder, it may cause social
disruptions, as it will be expensive for people to get into the fishery and only the big boats
will end up taking part (this happens anyway over time, with marketable permits).
Issue restricted rights to harvest a share of the quota
(Individual Fishing Quota System)
Under this system the regulators distribute marketable rights to shares of the total harvest quota
in any given year.
Advantages:
•
Discourages overcapitalization and encourages efficient harvest by those able to bid the most
for the harvest shares
•
Allows harvests to take place year-round, through market signals
Disadvantages
•
May be difficult to enforce. May cause boats to dump small fish and take only the best fish.
May lead to reduction in quality of data, as fishermen cheat on their reporting.
•
Inflexible: doesn't allow for in-season increases or reductions in the total quota
•
Same problems apply as for limited entry with regard to who gets the benefits from the
fisheries.
Impose a tax per fish harvested
This reduces the economic rents which fishermen are able to obtain from the fishery and thus
discourages excessive entry. The optimal tax equals the marginal social cost which a fisherman
imposes in addition to his own cost by his entering the fishery.
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