1. 1 Open access resource economics Why the free market fails to protect resources

2. 2 Motivation Group Project: Otters eating lots of shellfish, south of Pt. Conception. Marine Fisheries Service considering removing otters, and you are doing a CBA on the policy. What is the damage the otters are causing and thus the value of restricting them to the north of Pt. Conception? – See http://www.bren.ucsb.edu/research/2001Group_Projects/Final _Docs/otters_final.pdf http://www.bren.ucsb.edu/research/2001Group_Projects/Final _Docs/otters_final.pdf Value of reforming management of spiny lobster fishery? Abalone fishery? Value of “rationalizing” open access fisheries in Mexico?

3. 3 Examples Worm et al, Science, 2006: All fisheries could collapse by 2048 Costello et al, Science, 2008: Fisheries that use market-based regulation don’t collapse

4. 4 Some terms we will use Stock – total amount of critters -- biomass Intrinsic growth rate (recruitment) – biologic term Harvest – how many are extracted (flow) Effort – how hard fisherman try to harvest (economic term)

5. 5 Simple Model of Fish Biology Exponential growth – With constant growth rate, r: – = rx  x=ae rt Crowding/congestion/food limits (drag) – Carrying capacity: point, k, where stock cannot grow anymore: x ≤ k – As we approach k, “drag” on system keeps us from going further – Resource limitations, spawning location limitations Stock, x t t x k

6. 6 Put growth and drag together time Biomass (x) x Growth Rate

7. 7 Put growth and drag together time Biomass (x) x “Carrying Capacity” (k) Growth Rate

8. 8 Put growth and drag together time Biomass (x) xx MSY Stock that gives “maximum sustainable yield” Growth Rate

9. 9 Put growth and drag together time Biomass (x) xx MSY Stock that gives “maximum sustainable yield” Growth Rate Should we want MSY?

10. 10 Interpreting the growth-stock curve AKA: recruitment-stock; yield-biomass curves x Growth rate of population depends on stock size low stock  slow growth high stock  slow growth GR dx/dt = g(x)

11. 11 Introduce harvesting x H1H1 H2H2 H3H3 H 1 : nonsustainable  extinction H 2 : MSY – consistent with stock size X b H 3 : consistent with two stock sizes, x a and x c x a is stable equilibrium; x c is unstable. Why?? xcxc xbxb xaxa GR

12. 12 Introduce humans Harvest depends on – How hard you try (“effort”); stock size; technology – H = E*x*k x kE H x kE L x H k = technology “catchability” E = effort (e.g. fishing days) x = biomass or stock Harvest for low effort Harvest for high effort

13. 13 Will stock grow or shrink with harvest? If more fish are harvested than grow, population shrinks. If more fish grow than are harvested, population grows. For any given E and k, what harvest level is just sustainable? This can be solved for the sustainable harvest level as a function of E: H(E) – Solve (1) first for x(E) – Substitute into (2) to get H(E) k*E*x = g(x) (1)  H(E) = g(x)(2)

14. 14 “Yield-effort curve” H(E) E Gives sustainable harvest as a function of effort level Notice that this looks like recruitment-stock graph. This is different though it comes from recruitment-stock relation.

15. 15 Introduce economics Costs of harvesting effort – TC = wE w is the cost per unit effort Revenues from harvesting – TR = pH(E) p is the price per unit harvest Draw the picture

16. 16 $ TR=p*H(E) TC=w*E E MC=AC MR $/E E w E OA AR E MSY Two outcomes: Open Access vs. Efficient

17. 17 $ TR=p*H(E) TC=w*E E MC=AC MR $/E E w Rents to the fishery E* AR E MSY Two outcomes: Open Access vs. Efficient

18. 18 $ TR=p*H(E) TC=w*E E MC=AC MR $/E E w Rents to the fishery E OA E* Value of fishery maximized at E*. Profits attract entry to E OA (open access) AR E MSY Two outcomes: Open Access vs. Efficient

19. 19 Open access resource Economic profit: when revenues exceed costs (not accounting profit) Open access creates externality of entry. – I’m making profit, that attracts you, you harvest fish, stock declines, profits decline. Entrants pay AC, get AR (should get MR<AR) – So fishers enter until AR = AC (  TR = TC) But even open access is sustainable – Though not socially desirable What is social value of fish caught in open access fishery? – Zero: total value of fish = total cost of catching them

20. 20 Illustration of steady state outcomes X Sustainable Catch Maximum Sustainable Yield (Effort E MSY ) Efficient Catch (Effort E*) ○ ○ Open Access Catch (Effort E OA ) ○ Note: efficient catch lets biology (stock) do some of the work!

21. 21 Mechanics of solving fishery pblms (with solutions for specific functions) Start with biological mechanics: – G(X) = aX – bX 2 [G, growth; X stock] Harvest depends on effort: H=qEX Sustainable harvest when G(X) = H – First compute X as a function of E – Then substitute for X in harvest equation to yield H(E) which will depend on E only Costs: TC = c E Total Revenue TR=p*H(E) where p is price of fish Open access: find E where TC=TR Efficient access: find E where – Marginal revenue from effort (dTR/dE) equals – Marginal cost (cost per unit of effort)

22. 22 Example: NE Lobster Fishery Bell (1972) used data to determine catch (lb. lobsters) per unit of effort (# traps), using 1966 data – H(E) = 49.4 E - 0.000024E 2 Price is perfectly elastic at $0.762/lb. Average cost of effort: $21.43 per trap Open access equilibrium: TC = TR – E=891,000 traps; H=25 million lbs. – Compare to actual data: E=947,000;H=25.6 million lbs. Maximum Sustainable Yield – E=1,000,000 traps; H=25.5 million lbs. Efficient equilibrium – E=443,000 traps; H=17.2 million lbs.