Question

Members of a fishing village in New England have open access to a fishery (no one in the village explicitly owns the fishery). As long as an individual is a resident of the village, the individual can harvest as much fish as he wants from the fishery. All non‐residents are not allowed to fish. Given this scenario, is the equilibrium level of fishery harvest “too much” or “too little” or equal to the social optimum? Explain why this occurs. Support your answer by drawing the private and social, marginal cost and marginal benefit curves for fish. Identify the deadweight loss area if any exists.

Please give a detailed explanation for the answers. Thank you!

Answer 1

There is too much harvest of fish relative to the social optimum.This is because the fish stock is common property within the village. This means that the good is non-excludable within village members but rival.In this case, the stock of fish is not paid for which creates a lower private marginal cost of extraction than social marginal cost.Alternative, you can say that there is negative externality during the production process. Because no one pays for fish stock, my harvest will reduce available stock for others creating a lower private marginal cost than social marginal cost.There is no externality on the consumption of fish so marginal benefit social and marginal benefit private are the same.If we let the market work on its own, Qp ​​​​​ of fish is produced. But the socially optimal level is at Qs when we account for the negative production externality/common property resource. Since Qp>Qs then we produce too much.See the graph below: