EANRE LECTURE 4, FEBRUARY 27TH 2024

• Re-cap
• Non-renewable Resources: Hotelling Rule and realism

• Renewable Resources
• Bio-Economic Growth modelling
• Renewable resource use – Optimal harvesting
 NON-RENEWABLE RESOURCES:
CHANGING PARAMETERS
Hotelling Rule Parameter Effect on resource lifetime
Interest rate increase More profitable to have money in bank so use resource quicker, so
shortening lifetime
Monopolistic market Higher price constrains demand and so lengthens lifetime

Increase in resource stock (discovery, etc) Greater supply leads to lower price and so a shift to the right in the
price path leading to longer lifetime

Increase in demand Higher price results in faster extraction and so shorter lifetime

Fall in price of backstop (substitute) More demanded in current period, leading to shorter lifetime
technology
Increase in extraction costs Higher price constrains demand and so lengthens lifetime
 Renewable stock resources

• Living organisms: e.g. fish, cattle and forests, with a natural capacity for growth

• Inanimate systems (such as water and atmospheric systems) reproduced through time by
physical or chemical processes

• Arable and grazing lands as renewable resources: reproduction by biological processes (such
as the recycling of organic nutrients) and physical processes (irrigation, exposure to wind etc.).

Capable of being fully exhausted.

 Renewable Resources

Features

• Private property rights do not exist for many forms of renewable resource

• The resource stocks are often subject to open access; tend to be overexploited

• Policy instruments: relative merits

Historical Fish Catch Development Paths
(2010=100)
 Economics of renewable resource management

Biological growth processes

Gt = St+1 - St
where S = stock size and G is amount of growth

Density dependent growth.

i.e. growth rate depends on the stock size.

In continuous time:

G = G(S)
(We focus on fish here but the principles relate to any renewable resource)
 Biological growth processes

G = G(S)
An example: logistic growth –
 S 
G (S) = gS1 − 
 SMAX 
Where:
g = intrinsic growth rate (birth rate minus mortality rate) of the population
SMAX = finite upper bound on size to which the population can grow (its carrying
capacity), given environmental constraints
 GROWTH CURVES OF A RENEWABLE RESOURCE

Logistic growth curve

Stock (X)
Pure compensation growth curve
XMAX
Rate of growth

(X) MSY = maximum sustainable yield

MSY

F (X)

XMIN

XZERO TIME
X0 XMAX Stock (X)

In fish context, competition for food eventually reduces rate of population growth
Alternative biological growth rate patterns

• MSY = Maximum Sustainable

Yield = maximum amount of
growth

• SMIN = Threshold level of

stock below which population
will decline to zero.
• At low stock levels, growth rate is an
increasing function of stock size =
depensation

• If stock falls below SMIN, then falls

irreversibly to zero
Steady-state harvests

• Let H = harvest (or extraction) and G = net natural growth (G)

• In steady-state harvesting G = H and so = dS/dt = 0 (the resource stock size remains constant
over time = sustainable yield).

• There may be many possible steady states or sustainable yields.

• There is one particular stock size at which the quantity of net natural growth is at a maximum.
This is a maximum sustainable yield (MSY) steady state.

• A renewable resource could be managed to produce its maximum sustainable yield. Is this
always sensible?
 Steady-state harvests
G, H

GMSY = HMSY

G1 = H1

0 S1U SMAX
S1L SMSY

Periods of time in which the amount of the stock being harvested (H)
is equal to the amount of net natural growth of the resource (G).
 ECONOMIC MODELS OF A FISHERY

• Open access fishery

• enter if profit per boat is positive: R>C
• leave if profit per boat is negative: R<C
• in steady-state, R = C (revenue = costs)

• Closed access (private property) fishery

• Static model: select Effort (E) to maximise Profit = R – C
 OPEN ACCESS EQUILIBRIUM

The open-access model has two components:

1. a biological sub-model, describing the natural growth process of the fishery;

2. an economic sub-model, describing the economic behaviour of the fishing boat owners.

• Bioeconomic equilibrium (or steady-state) solution.

• the resource stock size is unchanging over time (a biological equilibrium)
• fishing fleet is constant with no net inflow or outflow of vessels (an economic equilibrium).
 ENTRY INTO AND EXIT FROM FISHERY

• Assume exogenous price: Market price = P

• Economic profit is the difference between the total revenue from the sale of harvested resources and the total
cost incurred in resource harvesting.

• Effort (E) applied will continue to increase as long as it is possible to earn positive economic profit.

• Conversely, individuals or firms will leave the fishery if revenues are insufficient to cover the costs of fishing.

→ dE/dt = ·NB where  is a positive parameter indicating the responsiveness of industry size to industry
profitability (NB).
When economic profit is positive, firms will enter the industry; and when it is negative they will leave. The
magnitude of that response, for any given level of profit or loss, is determined by .
 BIOECONOMIC EQUILIBRIUM

• Biological equilibrium occurs where resource stock is constant through time i.e. the amount being
harvested equals the amount of net natural growth: G = H
• Revenue = Price x Quantity Harvested = PH
• Cost = wage, (w) x Effort (E) = wE

• Economic equilibrium: NB = B – C = 0 which implies PH = wE.

• → dE/dt = 0 and so effort is constant at equilibrium level E = E*.

 Steady-state equilibrium fish harvests and stocks at various effort levels: G(S) = H

HMSY =
H1 = eE1S eEMSYS

H2 = eE2S
HMSY=(gSMAX)/4 Inverted U-shape curve = logistic
H2
growth function for resource.

H1
Rays = harvest–stock relationships
for three different levels of effort

E1 > E2
G(S)

S1 SMSY S2
=SMAX/2 Stock,
S
 Steady-state equilibrium yield-effort relationship

Total Costs
HOA =wE

PH = Total revenue
curve

EOA g/e
Effort, E

• Equilibrium {E, S} combinations map into equilibrium {E, H} combinations.

 OPEN ACCESS FISHERY
• In an open-access fishery, firms exploit available stocks as long as positive profit is available. While this condition persists, each
fishing vessel has an incentive to maximise its catch.

• But dilemma - for individual fishermen and for society.

• From fishermen perspective, the fishery is perceived as being overfished. Each boat owner pursues maximum profit, →
collective efforts drive profits down to zero.
• From social perspective, the fishery will be economically ‘overfished’. Moreover, the stock level may be driven down to
levels that are considered to be dangerous on biological or sustainability grounds.

• Although reducing total catch today may be in the collective interest of all (by allowing fish stocks to recover and grow), it is
not rational for any fisherman to individually restrict fishing effort.
• No guarantee that they will receive any of the rewards that this may generate in terms of higher catches later.
→ each firm will exploit the fishery today to its maximum potential, subject only to the constraint that its revenues must at
least cover its costs.
 PRIVATE-PROPERTY FISHERY: SPECIFICATION

1. There is a large number of fishing firms, each behaving as a price-taker and so regarding
price as being equal to marginal revenue
2. Each firm is wealth maximising.
3. Structure of well-defined and enforceable property rights to the fishery
→ owners control access to the fishery and appropriate rents.

• Biological and economic equations of the static private-property fishery model are
identical to those of the open-access fishery in all respects but one.

• Difference: the open-access entry rule, dE/dt = ·NB, which implies a zero-profit economic
equilibrium, no longer applies.

• Instead, owners choose effort to maximise economic profit from the fishery.
 Steady-state equilibrium yield-effort relationship:
Private property vs Open Access

HPP

HOA H=(w/P)E

EPP EOA g/e

Effort, E

Owners choose effort to maximise economic profit from the fishery.

The inverted U-shape: revenue–effort equation.
Ray: PH = wE;
Profit max where effort leads to EPP parallel to the slope of H = (w/P)E line.
 SOCIALLY EFFICIENT RESOURCE HARVESTING

• Privately maximising decisions will be socially efficient provided that a number of conditions
are satisfied.

These conditions include:

1. The market in which fish are sold is a competitive market.

2. The (gross) market price, P, correctly reflects all social benefits (i.e. there are no
externalities on the demand side).
3. There are no fishing externalities on the cost side.
4. The private and social consumption discount rates are identical, i = r. Reservoir fishing

• If one or more of those conditions is not satisfied, private fishing will not be socially
efficient.
 EXCESSIVE HARVESTING AND SPECIES EXTINCTION 1

Reasons for excessive harvesting to be more likely include:

• higher market (gross) resource price of the resource

• lower cost of harvesting a given quantity of the resource

• the lower the natural growth rate of the stock, and the lower the extent to which marginal extraction costs rise
as the stock size diminishes

• the higher is the discount rate

• the larger is the critical minimum threshold population size relative to the maximum population size.

Global freshwater fish populations at risk of extinction, study finds

World’s Forgotten Fishes report lists pollution, overfishing and climate change as
dangers

https://www.theguardian.com/environment/2021/feb/23/global-freshwater-fish-
populations-at-risk-of-extinction-study-finds
 EXCESSIVE HARVESTING AND SPECIES EXTINCTION 2
Regeneration
St+1 function
Slope = 1 + r
.
Slope = 1 Function shows resource stock level
available in period t + 1 (St+1) for any level
of stock that is conserved in period t (St).
R *t

. Efficient level of stock conservation, St*:

R MIN
Slope 1 + r = 1 +  or r = 
(variable)
=1+ Rt* = harvest that can be taken in
perpetuity .
A safe minimum standard (SMS) of
conservation
RMIN = minimum required level of
Implies that, under reasonable resource consumption
allowances for uncertainty, (dotted line)
threats to survival of resource systems
SMIN S*t St Since SMS at RMIN > SMIN, RMIN can be
are eliminated, provided it does not ~
entail excessive cost. SMS SM̂S harvested without interference with
sustainability
r = social discount rate,
 = rate of growth of the renewable
resource
 Renewable resources policy design

Policy principle: To encourage fishers to behave as if they owned the fish stock

Policy challenge: Common property management and enforcement within

poorly understood marine ecosystem

Policy Options
Command-and-control:
• Quantity restrictions on catches (EU/UK Total Allowable Catches (TAC))
• Fishing season regulations
• Technical restrictions on the equipment used - for example, restrictions on fishing gear, mesh or net size, or
boat size.

Incentive-based policies:
• Restrictions on open access/property rights
• Fiscal incentives
•Marketable permits (‘individual transferable quotas’, ITQ)
 POLICIES: EFFORT-BASED OPTIONS
• Include:
• Limits on fishing time and periods allowed
• Limits on number and size of fishing boats and
equipment
• Example:
• Australian Northern Prawn Fishery – 1 million
square km
• Limits on no. of boats, seasonal & area closures,
bans on daytime fishing for tiger prawns
→ Vessel buy-back reduced no. of boats from 200 to
52.
• Constraints
• Technological developments in boats/gear allow
more efficient fishing
 POLICIES: CATCH-BASED OPTIONS
• E.g. Individual Transferable Quotas: Cap-and-trade programmes for rights to catch a
quantity of fish over a given period from defined area
→ NZ ITQ: 636 fish stocks defined by fishing areas & species.
Each stock: Total Allowable Catch. Each boat has share of TAC → long-term property right,
based on historical patterns, and annual catch entitlement (ACE) adjusted by regulator. Trade
allowed through sale or lease of quota.
• Constraints
o Complex to implement
o Changing bio-economic conditions implies constant adapting of ACE.
o Rent to TAC-share owners. But common property → royalty payment to reflect social ownership
of resource? (Bromley, 2016)
 RENEWABLE RESOURCES: STURGEON DEPLETION IN THE CASPIAN SEA

Caspian is host to most of the world’s Sturgeon → 90% of global beluga caviar production = $300 million
 30
INTRODUCTION TO CASE STUDY
• Caspian sea famous as host to majority of global Sturgeon Stocks

• Catches declined in the mid 20th Century, but recovered with sound management

• Recent years, number of factors  reduced stocks.

• Modelling fish stocks

• behaviour under private fishery and open access

• Methods of regulation
 31

Habitat destruction: Loss of spawning grounds

• Spawning grounds crucial to natural

reproduction of sturgeon

• Damming of major rivers (particularly

Volga) significant factor in decline of
stocks
Volgograd dam reduced the available grounds
to 12% - lost all of Beluga grounds.
Only on the Ural do sturgeon still reproduce
naturally – but spawning population
destroyed by poaching and pollution
 32
FACTORS  DEPLETION OF STURGEON STOCKS IN THE CASPIAN SEA

Over fishing, Poaching and Illegal Trade

• End of the USSR, the strong regulatory system collapsed

• Strong financial incentives as a result of high price of caviar.

• Result: illegal catch estimated to be 6-10 times greater than legal

50% of international trade estimated to be illegal

Use of illegal fishing methods
Huge reductions in numbers and size of fish caught
Reproduction significantly reduced
Reduction in quality, reputation and price of caviar.
 33

Transboundary problems

• Before dissolution of USSR, well defined catch quotas and rigorous

enforcement
• Since, economic difficulties, and resources shared by seven states
• Fewer resources - and lower incentives to invest in stock
maintenance
• Benefits enjoyed by all countries:
externalities

• Fish stocks common pool resources

international cooperation is essential.
 34

MODELLING FISH POPULATION

DYNAMICS
Modelling stock growth and harvesting
• Growth function: account for growth rate of species, and
limits of habitat
• growth = F(Growth rate, (r), Stock (S), Carrying Capacity (C))
Stock (X)

XMAX

 S
E.g. Growth = rS 1 − 
 C

XMIN

XZERO TIME
 Growth in Stock (Tons)

-20
0
20
40
60
80
100
120
140
160

2
250
490
730
970
1210
1450
1690
Growth

1930
Fish Stock (Tons)

2170
2410
2650
2890
Growth
35
 36
INTRODUCING HARVESTING: BIOECONOMIC
G EQUILIBRIUM

HMSY G

H H

* * S
S 1 S 2

Bioeconomic equlibrium in the fishery model.

 37

THE OPTIMAL EFFORT LEVEL

G $
Steady
State
Revenue

H4SS
• •
H3SS
• •
H5SS H2SS

H1SS •
H6SS •

E
S E1 E2 E3 E4 E5 E6
Converting levels of effort into the implied levels of total revenue
 THE OPTIMAL EFFORT LEVEL
38

Total
$
Revenue

Total
• • Cost

ý
• •
p max.

• •

Effort
E1 E2 E3 E4 E5 E6

Identifying the profit maximising level of fishing effort

POLICIES AVAILABLE FOR REGULATION OF STURGEON 39

FISHERIES
• Direct restrictions on fishing efforts
• Limits on days at sea, size of engine etc.

• Optimal taxes on a fishery

• Tax on effort – e.g. licence fee
• Tax on catch

• Rights-based approaches - quotas on catch and effort

• Simple Total Allowable Catch (TAC)
• Individual Transferable Quotas

• Note: effective fishery management: 3 components

• Setting regulatory framework
• Effective monitoring and enforcement
• Efficient judicial process
 40

Implications for Sturgeon stocks of the Caspian?

• Joint management of stocks by all the littoral states is

imperative
analysis shows co-operation will always produce a better outcome

• Issues:
• Identifying appropriate Total Allowable Catch (TAC)
• Finding most cost-effective means to secure this catch
• Dividing TAC among countries in “fair” way

• Numerical example shows how this might be done using

biological/ economic analysis
 41

IDENTIFICATION OF A SOLUTION USING A NUMERICAL MODEL

• How can we use quantitative analysis to suggest best policy/ mix of policies?

1. Model growth of the sturgeon population

• Quantify the effects of different harvesting and reproduction policies.
2. Incorporate cost, revenue, lost spawning grounds
Economically efficient TAC
How much hatchery capacity is worthwhile
How might TAC might be equitably divided
 42

Modelling sturgeon stock reproduction

• Basic growth function:

 S
Growth = rS 1 − 
 C

Capacity (C) = 3000 tons

r = 10%
 43
MODELLING STURGEON STOCK REPRODUCTION

More realistic representation:

• account for time taken for sturgeon to reach maturity and therefore
reproduce
• growth now a function of weight of mature stock, and weight of
spawning population 15 years previously

 St 
• Modified growth function: G = (gS t −15 + yS t )1 − 
 C

 St 
G = (1.3S t −15 + 0.1S t )1 − 
 3000 
 Stock Growth (tons)

20
40
60
80
100
120
140
160

0
3

8
19

39

73
14
9
30
6
59
5
10
Stock (tons)

66
17
Stock Growth

30
24
25
28
60
29
88
Growth
44
 45
What catch level can be maintained at each level of the stock?

Sustainable Harvest

Sustainable Harvest (tons)

160.0
140.0
120.0
100.0
80.0 Sustainable Harvest
60.0
40.0
20.0
0.0
10
310
610
910
1210
1510
1810
2110
2410
2710
Stock (tons)
 Identifying the optimal stock level and TAC 46

Sustainable Harvest • Calculate in terms of maximising steady state profits

• If no harvesting costs, maximum profits at maximum steady
Sustainable Harvest (tons)

160.0
140.0
120.0
100.0
80.0 Sustainable Harvest
state harvest.
60.0
40.0 • Catch (harvest) of 138 tons, stock 2,230 tons.
20.0
0.0
10
310
610
910
1210
1510
1810
2110
2410
2710

Stock (tons)

• Assume harvest cost function:

• Cost = $3000 x Harvest +$2 x (3000 – Stock)
• Revenue function
• Revenue = $100 x H x 0.04
Revenue, Cost, Profit functions  Profit maximising
at Harvest = 121, Stock = 2,620 tons
 47

Fishery Revenues, Costs and Profits

1200000
Steady State Profits (US$)
1000000
800000
Production costs
600000
Revenues
400000
Profits
200000
0

2710
10
310
610
910
1210
1510
1810
2110
2410
-200000
Stock (tons)
 48

LOST SPAWNING GROUNDS AND THEIR REPLACEMENT BY HATCHERIES

• At 15 years a fish weighs 800KG

• Spawners produce 10000 eggs/ KG bodyweight
• Each mature fish spawns every 12 years
• 15.5 % eggs survive to become fingerlings
• 0.01% fingerlings survive to maturity

•  relationship between hatchery provision and maximum sustainable harvests

 49

OPTIMAL HATCHERY PROVISION?

• Assume: Hatchery costs for 1 million fingerling capacity
• $30,000 operating costs
• $35,000 capital costs

• Sturgeon production costs: As above

• Revenue Function: As above

• Calculate revenues and costs for each level of provision, each stock
Worthwhile to invest in hatchery capacity of 101,000 fingerlings
Sustainable catch level of 69 tons.
Steady state stock 2,830 tons.
 50

Identifying the Total Allowable Catch over time – and an equitable distribution

• Variety of regulatory policies could lead to the TAC, e.g.

• Moratorium
• Remove safe proportion of spawning stock

• Limiting catch to sustainable level

• Allocate transferable catch quotas to each state.
• On basis of mutually agreed criterion e.g. historical catches
• Hatcheries – equitable for investment in hatchery provision to be
compensated with increased share of quota?
 51

A COST-BENEFIT ANALYSIS FOR AN INDIVIDUAL HATCHERY

• Single proposed investment: to increase fingerling production from 11

million to 12 million

• Account for discount rate – calculate the Net Present Value of the investment

• Is the investment worthwhile?

• Assumptions: as above, but operating costs for the facility assumed to be $25,000,
capital costs $600,000
 52

11 million fingerling 12 million fingerling

capacity capacity
Steady State Stock
2,800,000 2,800,000
Steady State Catch
9,175 10,001
Production Costs
31,195,512 34,003,215
Hatchery Operating Costs
25,000 25,000
Revenues
34,865,572 38,003,593
Operating Profit
3,645,060 3,975,378
Changes in operating costs and revenues due to investment in hatchery

Operating profit increases by $330,318

• Does this justify investment cost?
 53
A cost-benefit analysis for an individual hatchery

• Assume that increase in operating profit takes 15 years

• In the meantime, no change, but Hatchery costs incurred
• Calculating discounted flow of net benefit: NPV = $14,353
→ investment worthwhile.

• But, if investing nation has access to only 20% of increased

steady state catch:
NPV of the project would be -$692,710
Investment not worthwhile unless compensation to investing
party or sharing of costs
 54

CASE STUDY CONCLUSIONS

• Problem of sturgeon depletion in the Caspian Sea is complex.
• Over-fishing, poaching and the use of illegal fishing methods,
• pollution
• loss of spawning grounds.

• Solution equally complex -

• Enforceable limits on catches
• Banning the catching of juveniles
• Limiting pollution
• Investment in mitigating, compensating for loss of spawning grounds.
 RENEWABLE RESOURCES: CONCLUSIONS
• Bio-Economic modelling useful in designing effective renewable resource management
• Quantifies biological growth rates
• Economic returns on harvesting
• Identification of maximum sustainable yield relative to economic rates of exploitation under
alternative property rights regimes

• Effective renewable resource management dependent on:

• Incentivisation of sustainable harvesting
• Effective enforcement
• Incorporation of externalities