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Lecture # 10 - Renewable Resources – Forests and Fisheries

 

The Economics of Fisheries and Wildlife

 

1. Background of Fisheries

  • Discussion is about fish, but it also applies to wildlife too.
  • Open access resource
  • Tragedy of the Commons
    • Fishermen have the incentive to catch as many fish as possible
      • If they conserve on fishing, then another fisherman will catch those fish
      • Fishermen may cause fish populations to decline and even become extinct
  • Technological improvements may have resulted in decline of fish populations
    • Commercial trawlers - ships that use nets to scrape the bottom of the lake or ocean
      • Catches almost everything
      • Bycatch - then workers throw out the fish and wild life they do not want or is illegal to catch
        • Catching the fish may have harmed it, thus is eventually dies when tossed back into the water.
        • Regulations prevent fishermen for catching too small of fish and they throw them back.
      • Supposedly trawling has converted the ocean floors in the Gulf of Maine into watery deserts.
    • Over investment into boats and fleets
      • Declining fish populations may cause fishermen to invest in more boats
        • Thus, more boats catching more fish cause a more rapid resource depletion
    • Sonar
      • Use technology to find where the fish are
      • The boats hone in and start catching
  • Demand for fisheries and wildlife
    • Demand for wildlife has a big impact on which species of fish is caught
    • 40% of the fish catch is eaten by people
      • Developed and developing countries eat fish for protein
      • Culture has an impact
        • Japan eats lots of fish
    • 33% of the fish catch is used for animal feeds or food for aquacultures
    • Aquacultures - fish farms
      • Pens are constructed in the ocean
      • Large amounts of fish are raised for harvest
      • Uses large amounts of feed and fertilizers
        • Fertilizers help algae and plant life grow faster, so fish have more food
      • May damage the eco-system
      • Some farmers use large tanks on land
        • Then the tanks require lots of water

2. Biological resources grow over time, thus the supply is the interaction of net birth rates and harvest rates

  • Renewable resources have two features.
    • Resource amount is determined by the biological growth and harvest rates.
      • Biological growth adds fish
      • Harvest removes fish
    • Market structure influences how much resources are used.
      • If it is open-access, then the resource is over-harvested.
      • A competitive market may also over harvest the fish
      • A monopoly will lower its harvest, causing market price and profits to increase
        • A monopolist again conserves a resource
  • Graph
    • Vertical axis - the growth rate of a fish species
      • net growth rate - births minus deaths
      • denoted as f(X)
      • Does not include harvest
    • Horizontal axis - the total population
      • Denoted as X
      • k is called the carrying capacity
        • The environment cannot sustain this species beyond this amount

Growth rate versus population for fish

  • Before the peak, fish rapidly grow
    • Plenty of food and space for the species
  • After the peak, the fish are depleting the environment
    • Food is more scarce and less space for the species
  • Economists use the logistic function
    • dX/dt = f(X) = aX – bX2
    • a and b are parameters
    • Maximum value
    • Set F(X) to zero
      • f(X) = X (a - bX) = 0
      • Xmin = 0
      • Xmax = a / b
    • Thus, k = a / b
      • Substitute b = a / k into F(X)
      • dX/dt = f(X) = aX – aX2 / k
      • or f(X) = aX (1 - X / k)
  • Fishermen over harvest the fish
    • Set the fish population to k
    • If the harvest rate > maximum population growth rate
      • Fish are harvested to extinction
      • Harvest rate is denoted by H
  • Example
    • Round #1
    • Set fish population to 100
    • Harvest rate is 10

Example shows fish depletion

  • Round #2
  • The fishermen removed 20 fish, but the fish population grew by 0
    • Remember, we are at k
  • We have 80 fish

Example shows fish depletion

  • Round #3
    • The fishermen removed another 20 fish, but the fish population grew at 5
    • Thus, the fish population is at 65

Example shows fish depletion

  • Round #4
    • The fishermen harvested another 20 fish, but the fish population grew by 7.
    • Thus, the fish population is at 52
    • As you can guess, the fish population will be driven to zero as fish are over harvested
  • Maximum Sustainable Yield (MSY) - the maximum amount of fish that can be caught will depleting them
    • The Harvest line intersects the maximum of the growth rate of fish

Sustainable Fishing - Maximum Sustainable Yield

  • Example shows the maximum sustainable population is 50
    • 8 fish are caught each period and the net birth rate is 8
  • Note - if the fish population is at 100, then the fish population drops to 50
    • i.e. the MSY
  • If the fish population is below 50, the fish are harvested until extinction
    • The net growth rate of fish is always lower then the harvest rate
  • Setting the harvest rate below the Max. Sustainable Yield (MSY)
    • We have two potential outcomes
      • High-density fish populations, i.e. the stable equilibrium
      • Low-density fish population, i.e. the unstable equilibrium

Mulitple equilibria for fish harvesting

  • High-density fish population
    • Stable equilibrium
      • If fish population is at k, or 100, then the fish population drops to 80 fish
        • Harvest rate > net birth rate
      • If fish population is greater then 20, then fish population climbs to 80 fish
        • Net birth rate > harvest rate
    • Unstable equilibrium
      • If we are exactly at 20, then the fish population stays at 20.
      • A small random event can cause the fish population to surge or decline
        • A small increase cause the fish population to grow to 80
        • A small decrease cause the fish population to be harvested to extinction
          • Harvest rate > net birth rate

3. Adding the economics to fish harvesting

  • Harvest depends on effort and the fish population
    • H = G(X,E)
    • This is a production function
      • Technically, there are time subscripts, but have been omitted to make equation nicer
    • Harvest is H
    • G is a function and assume it is a straight line
    • X is population of fish
    • E is effort
  • Effort - fishermen need boats, equipment, nets, bait, etc.
    • The more effort a fisherman expends, the higher the harvest
    • i.e. dH / dE > 0
  • Fish Population
    • The higher the fish population, the more the fishermen catch
      • Harvest is higher
    • i.e. dH / dX > 0
  • Shown below in diagram

Adding Effort to Fishing

  • It is possible to have the same harvest rate, but different levels of fish population and effort

Same harvest results from two effort levels

  • In the graph, we have the same harvest levels
    • However, the fish populations are different
      • Effort and fish population interact
    • X2 is a higher fish population that would require less effort
      • Easier to catch fish
    • X1 is lower fish population that would require more effort
      • More difficulty to catch fish
  • The steady state equilibrium
    • H = f(X)
    • The harvest rate equals the net birth rate of the fish
      • Fish population is at a steady state

4. Supply functions for renewable resources

  • Now we add prices and we have a profit function
    • Each fish has a price of P
    • Each unit of effort costs c
  • Profit function is: Total Revenue (TR) - Total Cost (TC)
    • profits = P H - c E
      • profits = P G(E, X) - c E 

Economic profits for fish catching

  • The total revenue function is a parabola because the more effort, the lower the harvest rates
    • The fish population is driven to extinction
  • If fish are open-access resource, then fishermen profits are driven to zero
    • Fishermen expend much effort in the terms of costs, i.e. E2
    • The harvest rates are low as well as the fish populations
  • If government imposed restrictions on catch, then fishermen can maximize profits
    • Fishermen expend lower costs for effort, E1
    • The harvest rates are higher because fish populations are higher
      • Remember, they expend much less effort

5. Backwards Bending Supply Functions

  • If market prices become too high, fishermen over harvest the fish, causing fish populations to fall
  • A high enough market price will cause an extinction of a species
  • Fish Market
    • Supply function - the fishermen
    • Demand function - the consumers who eat fish

Backwards Bending Supply Function

6. Government polices

  • Place ownership of the resource under one person
    • Not a problem if it is a lake
    • More of a problem for seas and oceans
    • The person could charge a fee to fish
  • Prohibit catching, fishing, or hunting during mating season
    • Called spawning for fish
    • Allow the species to procreate and replenish the stocks
  • Government restricts technology
    • Then fisherman have more difficulty in catching fish
  • Requires licenses for boats
    • Government requires a fisherman to buy a license for a boat
      • Fishermen see a price to enter the fishing market
      • However, they may overinvest in equipment to get the largest catches as possible
  • Prohibit and outlaw of catching, fishing, and hunting of a particular species
    • Example - Some species of whales were becoming extinct
      • Man found a substitute for whale blubber, which was petroleum
  • Individual Transfer Quotas (ITQ) - i.e. permits for catching fish
    • Used in Australia, New Zealand, Canada, Iceland, and Alaska
      • Example - Alaskan halibut and king crab fisheries provide examples
      • Before ITQ, the fishing season lasted 3 days
        • In three days, fishermen would race and catch as much fish as they can.
      • Now, it lasts 8 months
    • Government estimates the population growth rate and sets the harvest rate at an optimal rate
    • Government creates the number permits based on the optimal harvest rate
      • Government either gives or auctions the permits to the fishermen.
      • Fishermen are limited in the amount of fish that they can catch
        • One permit = one fish
        • Fishermen can sell shares if they want
    • Benefits
      • The fish becomes a property right
      • Fishermen have an incentive to take care and manage this resource
      • Fishermen will monitor their area and turn poachers and illegal fishermen into government
      • Reduces supply, so fishermen get a higher price
        • Creates rents
      • Fish may be fresher
      • Fish populations stay at high levels
    • Problems
      • Hard to apply to international waters
      • How to allocate shares?
        • Is the method fair?
      • Fishermen earn economic rent
        • Like a monopoly
  • Problems with policies
    • Some species are migrate
      • Tuna and swordfish travel large distances
      • They may migrate from a place with good management to another area that allows over fishing.

Economics of Forestry

 

1. Economics of forestry

  • Economics is different for a forest
    • Lumber jacks know where the trees are
    • Economic decision is still dynamic
      • Cut down tree today
        • Sell lumber to earn revenue
        • Invest profits into market to earn interest
      • Let tree grow another year
        • Next year, there is more lumber
          • If prices are the same, then they earn more revenue
        • The gain in revenue must compensate for not having the opportunity to earn the interest income
      • Arbitrage is still present

2. Deforestation - the clearing of land by burning the trees or selling the timber

  • Why?
    • People earn money from selling the timber
      • Lack of income
      • Export timber products provide income.
    • Clear the land for pastures, then they raise livestock
    • Plant crops
    • Government gives subsidies to clear land
      • For example, Brazil offered tax breaks for development of forested land, such as for cattle ranching
    • Lack of property rights
      • People who do not own the land have little incentive to preserve it.
      • People may illegally cut down and sell the trees to earn profits
        • Illegal logging cost governments $15 billion in 2002.
    • Human settlements
      • Pressures from population growth and migration
      • Lack of other energy supplies leads to using timber as a fuel.
    • War
      • United States destroyed forests in at least two wars
        • World War II -U.S. destroyed German forests as a means to hurt the German nation
        • Vietnam War - U.S. cleared forests with Agent Orange
          • Easy for the enemy to hide and attack U.S. soldiers in the dense forest.
  • Problems caused by deforestation:
    • Soil erosion - roots help hold soil together
      • If land is bare, then rainwater easily washes away soil
    • Water quality and supply both decrease
      • The land can become more arid
      • Tree roots bring water deep from the ground and pulls it up into the tree
    • Loss of biodiversity
    • Loss of animal habitat
    • Carbon emissions increase
      • Because forests serve as carbon sinks
      • Believe deforestation causes greenhouse gases to be 20% higher
  • Developing countries are reluctant to devote resources to problems such as biodiversity or global warming
    • The benefits are long-term.
    • Many developing countries have abundant natural resources, yet their populations are poor.
    • Resource-rich countries grow more slowly than other poor countries, even after controlling for other variables.
      • This paradox is known as “Dutch Disease.”
        • Increase in natural resources, like oil leads to appreciation in domestic currency.
        • A strong currency makes non-oil industrial sectors less competitive in world markets.
        • Consequently, the oil sector dominates the economy.
        • Oil-rich countries do worse on issues such as child mortality, nutrition, and education.
        • Oil revenues allow governments to keep taxes low.
          • Thus, population has less incentive to demand change.
      • Another Explanation
        • Government officials believe they have time and resources
        • They indirectly create a bad legal system
        • Society performs badly under this legal system

 

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