Topics Today 92308

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Topics Today (9/23/08)

• Incentives for conserving natural resources.
• Property right incentives for conservation
  (fisheries).
• Price incentives for conservation (groundwater).
• HW 2 due today.
• Read 4, and skim 5 from your reading list for
  next time.
• Exam 1 is Thursday, October 2.
• No homework this week.

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Some General Insights So Far

• Market failure arises when property rights to
  resources are not well-defined (e.g. not
  excludable, not tradable, etc.).
• Market failure calls for a change in the
  structure of property rights gt must consider new
  incentives.
• Policies that grant consumers and producers
  flexibility in achieving a social goal tend to be
  more efficient.

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Incentives Conservation of Natural Resources

• Q Is there market failure in the conservation of
  natural resources?
• Natural resources
• Forests
• Groundwater
• Fisheries
• Oil
• Minerals

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Open Access Resources

• Natural resources and open access
• Impure public good.
• Non-exclusive resource can be exploited by
  anyone gt typically referred to as open access.
• Rival any capture or harvest by one group
  subtracts from the amount available to others.
• External costs in ocean fisheries gt known as a
  marginal user cost.
• Fish reproduction depends on current stock.
• Fewer fish today gt fewer for future boats.

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Open Access

• Ex/ Ocean fisheries.
• WWII era most fisheries were biologically
  healthy.
• 1950s through 1970s
• Major expansion of fishing fleets.
• Most fisheries characterized as open access.
• Many stocks were considered over-exploited.
• U.N. Law of the Seas (1976)
• Extended national jurisdiction of seas to 200
  miles offshore.
• Established a property right.

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Current state of ocean fisheries
Source Myers, R., and B. Worm. 2003. Rapid
Worldwide Depletion of Predatory Fish
Communities. Nature, 423(15) 280-283.
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Current state of ocean fisheries
Source Myers, R., and B. Worm. 2003. Rapid
Worldwide Depletion of Predatory Fish
Communities. Nature, 423(15) 280-283.
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Current state of ocean fisheries
Source Myers, R., and B. Worm. 2003. Rapid
Worldwide Depletion of Predatory Fish
Communities. Nature, 423(15) 280-283.
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Current state of ocean fisheries
Source Myers, R., and B. Worm. 2003. Rapid
Worldwide Depletion of Predatory Fish
Communities. Nature, 423(15) 280-283.
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Current state of ocean fisheries
a1952 b1958 c1964 d1980 Colors indicate
fish caught per 100 hooks
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Open Access Incentives to Conserve

• Open access results
• Boats enter the fishery until profit (revenue
  cost) driven to zero (usual result in competitive
  markets).
• Costs for boats
• Labor, boats, gear, etc.
• The cost of the most important input (the fish)
  is zero.
• The zero profit condition is a characteristic of
  efficient competitive markets only when all input
  costs are paid by boats.
• Non-excludable access will cause resource to be
  inefficiently exploited.
• There is no incentive to conserve the resource gt
  tragedy of the commons.

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Open Access Incentives to Conserve

• Property rights provide incentives for
  conservation.
• Ex/ Land rent (Ricardos analysis)
• Consider a privately-owned landscape of fixed
  size.
• Suppose there are two types of land
• Productive 10/acre
• Marginal 5/acre
• If productive land is scarce, it earns rent (pure
  profit) of 5/acre.

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Open Access Incentives to Conserve

• Why do some natural resources earn profit?
• Differences in inherent productivity of the
  resource.
• Natural resources become scarce.
• Resource profit (i.e. rent) provides an incentive
  for the owner to conserve the resource.

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Fisheries Policy

• Regulated open access
• Government sets a total allowable catch (TAC)
• Once the TAC is reached, the fishery is closed
  for the season.

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Fisheries Policy

• Property rights with regulated open access
• As long as the TAC hasnt been met, the fishery
  is open access gt non-excludable.
• No transfer of property right allowed.
• Incentives with regulated open access
• Derby fishing gt race to the fish.
• Boats work non-stop to catch fish before other
  boats catch them.
• Encourages fishing in any weather.

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Individual Transferable Quotas (ITQs)

• Basic economics of ITQs is almost identical to
  tradable pollution permits
• Set an aggregate catch level (Total Allowable
  Catch, TAC)
• TAC may not be the efficient allocation
• We take the allocation as given and ask, How can
  we catch these fish as cheaply as possible?
• Allocate the catch among vessel owners
• Auction
• Allocation based on historical catch rates
• Allow boats to trade their quotas.

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Individual Transferable Quotas (ITQs)

• Observation
• Marginal costs of fishing vary across boats.
• Variation in captains skills.
• Size of vessels varies.
• Marginal costs of fishing are increasing with
  catch.
• As more fish are caught, boats travel farther to
  find fish.
• As more fish are caught, boats move to less
  productive fishing grounds.

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Individual Transferable Quotas (ITQs)
MCA
MCB

PO
PO output price of fish MNB PO - MC
Q of Fish

MNBA
MNBB
MNBAggregate
Q of Fish
QOA
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Individual Transferable Quotas (ITQs)
MCA
MCB

PO
PO output price of fish MNB PO - MC
Q of Fish

MNBA
MNBB
QTAC TAC QB Boat Bs share QA Boat As
share PQ Quota price
MNBAggregate
PQ
Q of Fish
QOA
QTAC
QB
QA
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Fishery ITQs in New Zealand

• Seafood is New Zealands 4th largest source of
  export income.
• System began in 1986 gt now 45 species covered.
• Many fish stocks were heavily depleted by 1986.

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Fishery ITQs in New Zealand

• Market effects (Newell, Sanchirico, Kerr 2002).
• 1500 annual sales 9300 annual leases.
• Brokerage firms have spawned.
• Value of quotas has grown over time (approx. 9
  annual increase for some stocks).
• Fish populations are gradually increasing.
• Total value of fishery has more than doubled
  between 1990 and 2000.

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Individual Transferable Quotas (ITQs)

• Advantages of ITQs
• Achieves a total catch at least cost gt ITQs are
  exclusive and tradable rights.
• Resource profit (i.e. rent) reflected in the
  quota price.
• No derby incentive in comparison to regulated
  open access.
• Disadvantages of ITQs
• May encourage consolidation in fleet.

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Incentives for Conservation

• If consuming a resource is cheap, there will be
  little incentive to conserve.
• Examples/
• Power
• Gas
• Water

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Incentives for Conservation

• Groundwater
• Individuals costs of pumping groundwater include
  cost of drilling wells, cost of land, etc.
• Individuals generally dont pay for the water.
• External costs of pumping groundwater
• Stock cost loss in water to future users.
• Depletion cost increased cost of drilling for
  other users.
• Risk cost less water for irrigation means
  farmers face higher risk in times of drought.

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Incentives for Conservation

• Ex/ Ogallala Aquifer
• Large-scale irrigation began after WWII.
• Ogallala recharges very slowly.

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Incentives for Conservation

• Ex/ Ogallala Aquifer policy proposals
• Tradable water deeds
• Each user gets water permits.
• Permits are forfeited for each unit pumped minus
  recharge gt permits are for depletion.
• Users are allowed to trade permits.

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Price Incentives for Conservation

• Ex/ groundwater use in Madison.
• Aquifer below Madison has dropped 60 feet in some
  spots due to water usage.
• Some springs have dried.
• Base flow of Yahara River and other Dane County
  creeks has been declining.
• New wells are digging deeper.
• Dane County
• Pump 60 million gallons / day.
• 140 gallons / day / person.

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Price Incentives for Conservation

• Ex/ groundwater use in Madison (cont.)
• Groundwater an open access resource?
• Are people generally excluded from tapping the
  aquifer?
• Property rights to drilling wells?
• Typical characteristics of open access aquifers
• Initial prices are low.
• Pumping costs rise too rapidly.
• Users on the periphery of a bowl-shaped aquifer
  are particularly hard-hit.

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Price Incentives for Conservation

• Ex/ groundwater use in Madison (cont.)
• Price system for Madison water (quarterly)
• 1st 25,000 cubic feet 0.97 / 100 cubic feet.
• Over 25,000 cubic feet 0.74 / 100 cubic feet.
• Price system for Cross Plains water (quarterly)
• 1st 30,000 gallons 1.34 / 1000 gallons.
• Next 70,000 gallons 1.26 / 1000 gallons.
• Over 100,000 gallons 0.74 / 1000 gallons.
• Incentive to conserve?