File: qanda17

Associated files:
Palch17.htm + Palch17.mws
Calc.xls

NATURAL RESOURCE AND ENVIRONMENTAL

ECONOMICS (3rd Edition)
Perman, Ma, McGilvray and Common

SUGGESTED ANSWERS

Answers to Questions in Chapter 17

Discussion questions

1. Would the extension of territorial limits for fishing beyond 200 miles from
coastlines offer the prospect of significant improvements in the efficiency of
commercial fishing?

It is doubtful whether such a policy is capable of being widely implemented and accepted
as being legitimate under international law. However, assuming it could satisfy those
conditions, would it improve fishing efficiency? One has to be very doubtful about this.
The main problem is that this mechanism generates no incentive for an individual fishing
boat owner to take account of the user cost of his harvesting. Suppose that an additional
unit of fish is harvested; its user cost is the present value of the entire stream of future
benefits that are lost by harvesting this incremental unit. These costs come from two
sources:
 the additional net growth of fish that would have taken place had the unit not been
harvested
 the future cost savings that would have arisen had the fish stock not been reduced
Looking again at Equation 17.33 in the text, the term dG/dS refers to the first of these two
components and the term –(C/S)/p refers to the second of them.

Our conclusion must be that territorial limits do little or anything, by themselves, to alter
the open access nature of fishing, and so fail to deal with the inefficiency consequences of
a failure of operators to take into account user cost.

2. Discuss the implications for the harvest rate and possible exhaustion of a
renewable resource under circumstances where access to the resource is open,
and property rights are not well defined.

We will leave you to answer this yourself. Note the relevance here of the answer to the
previous question.

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3. To what extent do environmental ‘problems’ arise from the absence (or
unclearly defined assignation) of property rights?

This is another one for you to answer unaided.

4. Fish species are sometimes classified as ‘schooling’(such as herring, anchovies and tuna)
or ’searching’(non-schooling) classes, with the former being defined by the tendency to
‘school’ in large numbers. In the text we specified fishery harvest by the Equation H =
H(E,S). For some species, the level of stocks has a much less important effect on harvest, and
so (as an approximation) we may write H = H(E). Is this more plausible for schooling or
searching species, and why?
An answer to this question will be provided shortly.

Problems

1. The simple logistic growth model given as Equation 17.3 in the text

gives the amount of biological growth, G, as a function of the resource stock

size, S. This equation can be easily solved for S = S(t), that is the resource
stock as a function of time, t. The solution may be written in the form

where and S0 is the initial stock size (see Clark, 1990, page 11 for
details of the solution). Sketch the relationship between S(t) and t for:
(i) S0 > SMAX
(ii) S0 < SMAX

An efficient way of answering this question is to use a computer software package.

A spreadsheet package, such as Excel, can be used to plot the function for
different initial values. Alternatively, we can explore this function using a
symbolic mathematical package. The file palch17.mws gives the Maple code
required.

The key steps followed here are:

 Define the logistic equation (it is a differential equation)
 Solve the equation to give S as a function of time, t. This solution is found to
be

SMAX
S(t) = ___________________
exp(-g t) (SMAX - S0)
1 + ---------------------
S0
 Define some parameters; we set SMAX=1000 and g = 0.01

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 Obtain the equilibrium value of S by setting dS/dt = 0 in the logistic equation
and then solving for S (which is here 1000)
 Choose starting values (S0) either side of this solution (we choose S0 = 400
and S0 = 1600
 Plot the solutions for the starting values

This gives the following Maple output. Note that the system has a stable
equilibrium converging to it (S = 1000) from above or below depending on the
initial value, S0.

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1 (b) An alternative form of biological growth function is the Gompertz function

Use a spreadsheet programme to compare – for given parameters g and S MAX – the growth
behaviour of a population under the logistic and Gompertz growth models.
An answer to this question will be provided shortly.

2. A simple model of bioeconomic (that is, biological and economic)

equilibrium in an open-access fishery in which resource growth is logistic
is given by

- eES

and
B - C = PeES - wE = 0

with all variables and parameters defined as in the section entitled 'Static
analysis of the harvesting of a renewable resource'.
(i) Demonstrate that the equilibrium fishing effort and equilibrium stock
can be written as

and

(ii) Using these expressions, show what happens to fishing effort and the stock
size as the 'cost-price ratio' w/P changes. In particular, what happens to
effort as this ratio becomes very large? Explain your results intuitively.

(a) It will be helpful to begin by listing and numbering the equations of our bioeconomic
system:
 S 
G (S)  g 1   S  eES (1)
 S MAX 

(2)

Equation (1) describes the instantaneous rate of change of the fish stock, G(S). The first term
on the right-hand side is a logistic function, giving the ‘natural’ net rate of change of the fish
stock; the second term is the amount of fish harvested. The fish stock will be in a biological
equilibrium (or steady state) when the natural net growth is equal to the amount harvested,
and so G(S) = 0. Hence in biological equilibrium we have
 S 
g 1   S  eES (3)
 S MAX 
or, after dividing both sides by S and by e
g S 
1  E (4)
e  S MAX 

Equation (2) states the open access economic equilibrium condition that total revenue (B)
equals total cost (C), so that no rent is being earned by a representative fisher. From equation
(2) we know that

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PeES  wE
and so
w
S (5)
Pe
Substituting (5) into (4) gives
g w 
E  1   (6)
e PeS MAX 
Equations (5) and (6) are the results we were asked to derive.

(b) Both S and E depend on w/P, a ration of input unit costs to output price. Writing (5) as
 1 w
S 
 e P
we see that, other things remaining unchanged, the fish stock rises as w/P increases. Indeed,
if e, the catchability coefficient, is a constant number then S is directly proportional to w/P in
this model. This result is intuitively reasonable; as the cost of catching fish (w) rises one
would expect fishing effort to fall, and so the stock to rise. And as the price of a harvested
fish rises, more effort will be devoted to catching fish, and so the equilibrium population
stock falls.
Similarly by writing (6) as
g  g w
E  2 
e  e S MAX  P
it is evident that E has a negative linear relationship with w/P. The intuition for this has
already been given above.

Notice, finally that as w/P becomes increasingly large, a point will be reached at which
 g w
 2  becomes equal in size to g/e, and so E falls to zero. (Remember that E cannot
 e S MAX  P
be negative). In this case, the fish population will grow until its stock size becomes equal to
the maximum that its environment will sustain, that is S MAX.

3. In what circumstances would it be plausible to assume that, as a first approximation, harvest

costs do NOT depend on stock size?

An answer to this question will be provided shortly.

4.
(i) The results of this chapter have shown that the outcomes (for S, E and H) are
identical in what has been called the PV maximising model and the static private
fishery profit maximising model when the discount rate is zero. Explain why this is
so. Also explain why the stock level is higher under zero discounting than under
positive discounting.
(ii) It has also been shown in this chapter that as the interest rate becomes
arbitrarily large, the PV maximising outcome converges to that found
under open access Why should this be the case? (If you are using the
exploit5.xls spreadsheet, this result can be quickly verified. In the
worksheet ‘Steady states (2)’, note that at i =1000, the present value

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 outcome is more or less identical to that which emerges under open
access.)

An answer to this question will be provided shortly.

5. Calculate the ‘growth rate’, dG/dS, at which the fish population is growing in the open access
equilibrium, the static private property equilibrium, and the present value maximising equilibrium
with costs dependent on stock size and i = 0.1, for the baseline assumptions given in Table 17.3. At
what stock size is dG/dS = 0 (the maximum sustainable yield harvest level)? Explain and comment
on your findings.

An answer to this question will be provided shortly.

6. Demonstrate that open access is not cost-minimising.

An answer to this question will be provided shortly.