Externalities and overfishing in the fishing industry

by cucumber59 (student)

University Degree Business and Administrative studies

Introduction

Due to our large demand for fish we are overfishing the oceans. This is damaging our fish stocks beyond repair. The EU has tried to make the fishing industry more sustainable by implementing quotas, although there are other options available with differing results. I will first analyse why overfishing occurs and then the methods which could be used to prevent it.

Why does overfishing occur?

In markets where externalities exist the quantity of the competitive equilibrium (Q1) is different to the socially optimal level, SOL, (Q2) as shown in Figure 1. This model assumes there are no transition mechanisms when moving from one equilibrium to another.

Negatives externalities are evident in the fish market. A negative externality exists when “the actions of one party imposes costs on another” (Pindyck and Rubinfeld, 2009). There is a large demand for a small number of species of fish. Since the fish stock cannot be replenished as quickly as it is caught, these popular species become less abundant which in turn makes them more costly to catch. Large-scale fishing can also disrupt food chains and harm ecosystems.

These costs are shown in Figure 1 as the Marginal External Cost (MEC) curve. The Demand curve represents the marginal benefit to society and the Supply curve represents the marginal cost (MC) to the producer of producing one more unit. The Marginal Social Cost (MSC) curve is the sum of the MEC and MC and consequently has a steeper gradient than the Supply curve. This means that its intersection with the Demand curve has a lower quantity value, creating a cost to society equal to the shaded area, and so the quantity producers want to supply is over that which is socially optimal. This is why the quantity of fish caught is classed as ‘overfishing’.

The question is why producers, who are a part of society, would want to produce over the SOL. The cost to society of overgrazing common land by the addition of another animal is divided between all members of society, (Hardin, 1968). This makes them almost nonexistent to the individual. However, all of the proceeds of the animal go to the owner. Therefore, to each individual, the gain is more than the cost. As any rational producer will try to maximize their own surplus, each one will add another animal to the common land, or catch another fish from the ocean up to the profit-maximizing level (where marginal cost equals marginal revenue).

If the resource is common property, everyone has free access to it and there is no limit on how much they can take or use. Therefore they will only stop using the resource once it becomes economically inefficient to continue. The results are the same whether the ‘individual’ is one fisherman or one country. As negative externalities of aggressive fishing are not limited by borders, there is a need for a governing body, who will think of the good of the global society rather than the individual person or country, to limit the quantity of fish caught. But there ...

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Another difficulty is how to determine a limit. The external costs cannot be easily quantified as valuing a species becoming extinct is subjective. Costs are also a challenge to measure and predict, for example, decreasing numbers of a species may be due to pollution, not the fishing industry. Therefore the MSC is only an estimate and the social equilibrium quantity aimed towards when implementing a quota may be wrong.

How does a quota impact consumer and producer surplus?

Figures 2 and 3 show examples of what the supply and demand for fish in the EU and the MSC associated with this may look like. Figure 3 shows how a quota set at the SOL affects surplus. The supply curve becomes inelastic at Q2, and the price increases to that which consumers are willing to pay for the new quantity, P2. The difference between what consumers are willing to pay and what they actually pay, consumer surplus, is now area A. Area B becomes producer surplus (the difference between what producers need to receive and what they get) and area C becomes part of the deadweight loss. Producers have lost area E so their surplus is now B+D and the total deadweight loss is area C+E.

Consumers have lost out and, depending on the elasticity of supply and demand, producers may have either lost or gained. Overall, the deadweight loss shows that there is a loss to society associated with a quota. If the MEC has been overestimated the quota will be too low, needlessly reducing surplus. If it has been underestimated, the quota will be too high and the quantity caught will be unsustainable.

Quotas are placed on the most popular species of fish so fishermen supply alternative species to fill the demand, causing problems. For example, nets used to catch sole have a small mesh which results in cod being caught as by-catch. These then have to be discarded as cod quotas have already been met, meaning no producer surplus can be gained (Channel 4, 2011). So a quota may not manage to lower MSC much, but will always decrease surplus.

Fishermen are given quotas for fish which are scarce in their area so have to use unsustainable methods to catch them (Channel4, 2011). Opening a market for quotas would solve this problem whilst keeping the total number of fish caught fixed. However, since quotas have been sold in the UK, fishermen with lower MC (who use more socially costly methods) have bought more quota (Cardwell, 2011) so the proportion of unsustainable fishing methods in the fishing industry has increased as a result of this market.

What options, other than a quota, are available and how do they compare?

Assuming fishermen are maximizing working hours and catch, no-take zones and limiting days at sea work similarly to a quota. Instead of setting restrictions to follow, they limit resources available to fishermen. This means they do not have the problem of discarded by-catch and so reduce MSC more effectively than quotas.

However, fishermen will want to catch more in their time limit or restricted area so will make their fishing methods more efficient if possible, thereby increasing MC. This will increase MSC by at least the same amount (new methods may also increase external costs), meaning the new SOL is at least as far from the competitive equilibrium as before.

Alternatively, the EU could introduce a fee per fish landed or tax per fish bought equal to

MEC at the SOL. S2, Figure 5, represents the quantity fishermen are willing to supply at the

price the consumer pays with a tax. The vertical difference between S2 and the Supply

curve equals the tax since the price fishermen receive equals: price consumers pay - tax.

The new equilibrium quantity is where: price fishermen are willing to receive = price

consumers are willing to pay – tax i.e. where the demand curve intersects S2. It may be

easier to add the tax to the price consumers pay as fishermen could avoid paying a fee by

landing their fish in another country, but the result is the same. Consumers pay more than

at the competitive equilibrium, fishermen receive less and whoever is least price elastic will

bear the burden of the tax. If MEC has been estimated incorrectly, there will be the same

problems as with a quota. The tax revenue, B+D, could be used to fund research to find

MEC more accurately.

Enforcing laws which only allow fish to be caught for human consumption would limit the demand fishermen could legally supply to (Monbiot, 2011). This would shift the demand curve down which would also reduce the social equilibrium so the new quantity may be more sustainable but will not be socially optimal. Also there is a larger deadweight loss than in the case of a quota (Figure 6).

Alternatively they could raise awareness of overfishing as has been done with CO2 emissions to reduce demand for fuel. However there will probably be the same overall demand for fish, only some will be shifted to other species. If demand is shifted to fish caught in a smaller mesh net, as previously explained, the number of popular fish caught – and therefore MSC – may not decrease.

Decreasing the number of fish which can be caught inevitably means fewer fishermen are employed. Fishing would not need to be reduced if the socially optimal level could be increased i.e. if the MEC, and therefore MSC, could be reduced (Figure 8). Legislation preventing unsustainable fishing methods would achieve this.

Conclusion

There are various methods which could be used to make the fishing industry more sustainable, all with their own drawbacks and which need the co-operation of all countries to be implemented effectively.

References

Microeconomics, page 641, Pindyck and Rubinfeld, 2009

The Tragedy of the Commons, Garrett Hardin, 1968

Fish Fight, Channel 4, 2011

Who owns the right to catch fish? Manchester United?, Emma Cardwell, 2011

Mutually Assured Depletion, George Monbiot, 2011