AAE 142 Topic 5 Economics of Fishery Resources 1st Sem AY 2023-24 PDF

AAE 142 COURSE NOTE TOPIC 5: ECONOMICS OF FISHERY RESOURCES1 At the end of the chapter, the students should be able to: a. discuss the trends in the use of fishery resources, b. determine the conditions for efficient allocation of fishery resources, and c. discuss re...

AAE 142 COURSE NOTE TOPIC 5: ECONOMICS OF FISHERY RESOURCES1 At the end of the chapter, the students should be able to: a. discuss the trends in the use of fishery resources, b. determine the conditions for efficient allocation of fishery resources, and c. discuss relevant issues associated with fishery resource use. 1 This course note was prepared by Cenon D. Elca, Assistant Professor at the Department of Agricultural and Applied Economics, College of Economics and Management, University of the Philippines Los Baños for educational purposes only. Use of this material must be limited only for personal use of enrolled students of AAE 142. No part of this material may be reproduced, distributed, exhibited in any form or manner, quoted, or cited without the written consent of the author. 5-1 5-2 F(X) is usually represented with a logistic function or a parabola. Fish stock or biomass represented by X has a range of 0 to k. k is the carrying capacity of the fishery or the maximum population or biomass that a particular habitat can support. Stated in another way for simplification, k is the maximum biomass that can be supported given the fixed food supply in the habitat. Starting at 0, the stock will grow and lead to a small but positive stock (for example at X1). The biomass will grow rapidly and reach a maximum (for example at XMSY), then decline (for example at X2) until the biomass reaches its maximum capacity (for example at k). Notice that biomass growth can be identical at different levels of stock (see growth F1(X) corresponding to both X1 and X2). This means that growth F1(X) can both lead to X1 (a small population or small biomass) or X2 (a large population or large biomass). At X1 small population, fish births outnumber fish deaths, because population is small with ample food provided for by the habitat. At X2 large population, births outnumber deaths combined with a food supply that is scarce. We define a biological equilibrium as the level of biomass X for which there is no growth in the population or biomass. To put simply, a biological equilibrium is when dX/dt = F(X) = 0. There are two possibilities of biological equilibrium in our model: X = 0 and X = k. If X = 0 there are no fish and therefore no growth occurs. If X = k, then the fish population has reached the carrying capacity of the habitat (e.g. provision of food), thereby eliminating any further growth. The fishery growth curve can be represented by logistic function of the form: F(X) = rX(1- X/k), where k is the carrying capacity of the habitat, and r is the instantaneous growth rate of X when this stock is close to zero. We assume that k and r are exogenous or they take on specific or constant values. 5-3 We will now introduce the activity of harvesting into the fishery growth model. We assume initially that harvesting is a costless activity. We introduce three different rates of harvest: H1, H2, and H3. Harvest H1 is above the fishery growth curve. This implies that more fish are being removed than being reproduced at each possible level of X. This is not sustainable since this means that harvest is greater than the ability of the fish population for new births and growth of existing members. The fish stock will therefore decrease to zero, and eventually driven to extinction. Consider Harvest H2. H2 corresponds to the maximum growth of the fishery growth curve. H2 is also associated with the maximum level of biomass indicated as XMSY. MSY stands for maximum sustainable yield. Suppose that H2 amount of harvest was made at a time where the biomass is at k, or fish population is at carrying capacity. Since H2 is greater than any level of growth F(X) from XMSY to k, the fish stock will slowly decrease from k to XMSY. Or to put it simply, the growth of fish stock cannot keep up with the level of harvest withdrawal. At biomass stock equal to XMSY, the highest sustainable harvest H2 is achieved because at this level of harvest removes fish equal to the fish stock that grows. That is H2 = F(X). H2 = F(X) is also called the most desirable equilibrium in the fishery growth curve. Consider another scenario where H2 amount of harvest was made to the left of XMSY. In this case H2 > F(X) for any level of X or fish stock. Again the level of harvest is beyond the ability of fish stock to grow. This will result in eventual fish stock depletion. Finally, at H3 harvest, there two equilibrium points, or point of intersection of H3 and F(X). These points correspond to fish stocks X’ and X’’. If H3 harvest is made at fish stock k, fish stock will gradually decrease from k to X’’, since H3 > F(X). But once the population reaches X’’, there will no further stock movement since H3 = F(X), or the stock rate of growth is equal to the amount of harvest. The habitat will always provide H3 amount of harvest, while the fish stock remains at X’’. The stock difference of k - X’’ is the stock reduction from the carrying capacity at k to arrive at a desirable sustained yield of H3 at X’’. H3 at X’’ is an example of a desirable sustained yield. Suppose that instead of harvesting at k, the activity is done between X’ and X’’. Begin by harvesting H3 at X*. At X*, the rate of growth is given by F(X*). At X*, harvest is less than growth, that is H3 < F(X*). The tendency in this case is for the fish stock to grow from X* to X** to XMSY and finally to X’’. At X’’, no further improvement in fish stock is possible since at X’’, H3 = F(X). Thus, any fish stock size that are located to the right of X’ will ultimately end up at X’’. X’’ is also referred to as a stable equilibrium, implying that if there is a slight movement to the left or to the right of X’’, the level of fish stock will always return to X’’. The arrows pointing towards X’’ is a reiteration that X’’ is a stable equilibrium. Suppose that harvesting starts to the left of X’. At this level, fish stock will slowly decrease towards zero since fish harvest is greater than fish growth. When harvesting starts at exactly X’, any slight movement in stock to the right will ultimately lead to X’’, and any slight movement to the left will ultimately end up to fish extinction. This is the reason why X’ is considered as an unstable equilibrium, highlighted by the arrows directed away from X’. 5-4 The first harvest function shown above is H = G(E, X). It is upward sloping starting from the origin, which indicates that as more effort and more biomass are available, the higher is the level of harvest. Take note that although the harvest function is increasing, it is increasing at a decreasing rate. This is indicative of the law of diminishing marginal return because a variable input (X in this case) is combined with a fixed input (E in this case). 5-5 We assume that fishing effort is fixed at E0 in combination with an initial fish stock of X. This combination will produce a harvest equal to H. We then assume that fish stock improves from X to X’. The harvest function will then shift upward from H = G(E, X) to H’ = G(E, X’) as a result of the increase in fish stock. Fish harvest then increases from H to H’. Stated in another way, this means that for a given level of effort, the higher the fish stock available, the higher the volume of fish that can be harvested. We assume for simplicity that the harvest function is linear. We also bring back the fishery growth curve F(X). Recall that for a fishery growth curve with harvest, an equilibrium is achieved when H = F(X), or the amount of harvest is exactly equal to stock growth. We therefore start at the intersection of H = G(E, X) and F(X), which corresponds to fish stock X, yielding a harvest equal to H. We next assume an increase in effort from H to H’. This will result for the harvest function to pivot from right to left where we have a new harvest function of H’ = G(E’, X). This, in turn, will also result for the fish stock to decrease from X to X’. Take note that harvest stays the same, that is H = H’, even after increasing effort from E to E’. Another conclusion we make from this is that any effort level to the left of XMSY is not desirable or inefficient since the same harvest can be obtained at much lower effort. 5-6 We further assume the following: a) Unit cost of harvesting is constant, or it will cost c per unit of effort to harvest. Total cost (TC) therefore is equal to c times E or cE, b) Price of fish is constant and equal to one. Total revenue (TR) is the price of fish per unit harvest times the volume of fish harvested, or TR is equal to P (or price) times H (or harvest), or simply PH. Since P = 1, TR is also equal to H. Assumption a) implies that total cost (TC) is a linear function of effort E, or the total cost curve is an upward sloping straight line depending on the level of effort. For assumption b), recall that an equilibrium is achieved when H = F(X). Since TR = PH and we assumed that H = 1, therefore TR = H or TR = F(X). In other words, the TR curve is also the fishery growth curve. 5-7 These curves (TC and TR) are shown in top half of the above figures. The bottom half also shows the unit curves that can be derived from the total curves. These are AR (TR/E), MR (dTR/dE), and MC (dTC/dE). Since we are dealing with a perfectly competitive market, the MC is a constant term equal to c. The profit-maximizing condition that corresponds to a level of effort is that MR = MC. This equality also ensures that profit (TR-TC) is maximum at a particular level of effort. In the above figure, the profit-maximizing level of effort is at E* [Figure (a)], where there is equality of MR and MC [Figure (b)]. In both figures, profit is indicated as Rent. E* is also called the private property equilibrium. We initially assume that the level of effort is at E*, or the equilibrium of harvesting under private property. Since rent or profit is positive at E*, there will be incentives for more firms to come in. More firms coming in imply that fishing effort will rise. This increase in effort will be from E* to E0. The increase in effort will stop at E0 because profit or rent beyond E0 will 5-8 be negative. Notice that at effort E0, TR is equal to TC, implying that rent or profit is zero as seen in the top figure. The bottom figure shows that open access equilibrium is the point where AR = MC. ITQs are simply a way to enforce private ownership---assuming improved stewardship of fishery resources. It gives fishers a portion of the annual allowable catch. Say, in a year 7,400,000php worth of wreckfish was harvested... the fisher gets 7,400php of that (as 0.1) 5-9 Review Questions:  Discuss the three equilibrium conditions in a fishery growth curve with harvesting model.  Discuss and differentiate the equilibrium condition of harvest between an open access and private property right. Assessment Tool: Exercise on the graphical derivation of the equilibrium in an open access fishery when the price of fish increases. References: Hartwick, J. and N. Olewiler. (1998). The Economics of Natural Resource Use. Addison- Wesley. Tietenberg and Lewis. (2012). Environmental and Natural Resource Economics: 9th Edition. 5-10