Public Goods and Common Resources 11

The Different Kinds of Goods Public goods & Common resources Not excludable: people cannot be prevented from using them (free riders) Externalities Public Good: positive externality/benefits for the public, but not compensated for in market SMB > PMB -> 2 different demand curves Produce too little when PMB = PMC (Market) Common property resource: negative externality/costs PMC < SMC -> 2 different cost curves Overuse of the resource

Criteria Use For Classifying Goods Excludability – can people be excluded from using the good it they don’t pay for it? Common Property (e.g., Parks, Fishery) – NO! Rivalry in consumption One person’s use diminishes other people’s use Common Property – Yes! (Trees, Fish)

Public Goods & Common Property Resources Common Property Resource – also not excludable, but is rival in consumption Can’t exclude others from using/accessing the resource (fish, timber/forests) -> leads to overuse and possible exhaustion of the resource

The Different Kinds of Goods Types of goods Public goods Not excludable & Not rival in consumption Common resources Rival in consumption & Not excludable Private goods Excludable & Rival in consumption Natural monopoly Excludable & Not rival in consumption

1 Four types of goods Rival in consumption? Yes No Excludable? Private goods - Ice-cream cones - Clothing - Congested toll roads Natural monopolies - Fire protection - Cable TV - Uncongested toll roads Common resources - Fish in the ocean - The environment - Congested nontoll roads Public goods - Tornado system - National defense - Uncongested nontoll roads Goods can be grouped into four categories according to two characteristics: (1) A good is excludable if people can be prevented from using it. (2) A good is rival in consumption if one person’s use of the good diminishes other people’s use of it. This diagram gives examples of goods in each category.

Renewable Common-Pool Resources: Fisheries and Other Commercially Valuable Species

Growth rate (replacement) and size of the fish stock/pool Too Small/Low Stock Size Lower growth rate as fish can’t hook up and reproduce Birth (replacement) less than death/harvest Growth rate declines; species becomes extinct Too Large Stock Size Food sources (plankton, biomass, other fish) too small to support large # of fish Growth rate declines

Schaffer model: Relationship between the Fish Population and Growth

How do we use this to manage the fisheries (prevent extinction) Compare Open Access Fishery (Tragedy of the Commons) Everyone who has a boat can harvest as many fish as they can catch profitably Maximum Sustainable Yield (MSY) What is the largest stock of fish that can be sustained from one year to the next (harvest = growth rate at max stock size) Economically Efficient Given costs/benefits – what is the efficient harvest

3 Possible Solutions 1. Open (unregulated) Fisheries (Ec) Catch until total costs exceed revenues (up to zero profits) => ATC(Q) = TotRev(Q) = P*Q 2. Maximum Sustainable Yield(MSY) (Em) Largest “harvest” that can be sustained every year (harvest = replacement rate) Biologist solution 3. Economically Efficient (Eo) Maximize Economic Value (MC(Q) = MR(Q)

FIGURE 14.2 Efficient Sustainable Yield for a Fishery

Policy Options Command and Control (Regulation) Set Quota for number of fish that can be caught Ignores differences in costs/efficiency of fishermen Can lead to over capacity (too many boats, too big) Discarded catch/by-catch issues Tradable permits (ITQs) Determine optimal “harvest” and number of licenses to be issued Divide quota/target by number of license = #fish caught per license Auction or grandfather licenses Allow owners to trade (one-year, or multi-year) Multi-species/by-catch Taxes Per unit tax on the #fish caught

Individual Transferable Quotas (ITQs) An efficient quota system will have the following characteristics: The quotas entitle the holder to catch a specified volume of a specified type of fish. The total amount of fish authorized by the quotas should be equal to the efficient catch level for that fishery. The quotas should be freely transferable among fishermen.

Taxes also raise the real cost of fishing, but do so in an efficient manner. Unlike regulations, the tax can lead to the static-efficient sustainable yield allocation because the tax revenues represent transfer costs and not real- resource costs. Transfer costs involve the transfer of resources from one part of society to another. For the individual fisherman, however, a tax still represents an increase in costs.

Taxes also raise the real cost of fishing, but do so in an efficient manner. Unlike regulations, the tax can lead to the static-efficient sustainable yield allocation because the tax revenues represent transfer costs and not real- resource costs. Transfer costs involve the transfer of resources from one part of society to another. For the individual fisherman, however, a tax still represents an increase in costs.

FIGURE 14.7 Effect of Regulation

Individual Transferable Quotas (ITQs) An efficient quota system will have the following characteristics: The quotas entitle the holder to catch a specified volume of a specified type of fish. The total amount of fish authorized by the quotas should be equal to the efficient catch level for that fishery. The quotas should be freely transferable among fishermen.

TABLE 14.1 Countries with Individual Transferable Quota Systems

Subsidies and Buy Backs One of management options to reduce overcapacity. Payments used to buy out excess fishing capacity are useful subsidies, but if additional capacity seeps in over time, they are not as effective as other management measures.

Marine protected areas and marine reserves are areas that prohibit harvesting and are protected from other threats such as pollution. Marine protected areas are designated ocean areas within which human activity is restricted. Marine reserves protect individual species by preventing harvests within the reserve boundaries.