Question

Can collusion benefit the environment? It seems that way from the experience of fisherman in Australia and New Zealand. Instead of their earnings come from their individual catches, they get share of the revenue of the industry as a whole. This has led to an increase in profits because it gives the individual less incentive to fish, increasing fish stocks. Now, when the fisherman ventures out, they do not have to go as far to find fish, lowering their costs. Higher prices for the fish and lower operating expenses, translate into higher profits. More fish in the ocean and higher profits for fisherman-it seems to be a clear Pareto improvement.

Cartels usually benefit producers-and yet they usually break down for a reason. Here, profits are up, but the revenues are down. This suggests an incentive to cheat. Suppose the cartels works and the local fish supply rebounds. Meanwhile, the price of fish has risen substantially. The fisherman can now fish close to home, facing the lower costs but has every incentive to sell some of his catch for a slightly lower price (even if he has to sell his catch on the black market), increasing his profits further. Only a matter of time before the cartels break down. Commercial fishing can be extremely dangerous but also very lucrative. If you take away the large upside of risking your life for an exceptional catch, what incentive do the fishermen have? Further, quite a bit of fishing occurs in international waters. There exists a rather contentious relationship between Alaskan and Canadian fishermen in the Pacific Northwest, cooperation between them is unlikely and if only one country colludes will the fishing stock still rebound?

Still, if these inherent problems can be overcome, an interesting policy question presents itself. If overproduction of the good in question has negative externalities, does imposing a cartel provide an alternative to credits or taxation?

Based on the PARAGRAPH above, discuss the following:

1. Discuss the externality involved in commercial fishing and its impact on stocks of fish. (5MARKS)
2. Explain how collusion among fishermen can lead to socially efficient fishing activities and discuss the potential problems/threat to the fishing cartel. Consider also the fact that commercial fishing occurs in international waters. (9MARKS)

Answer 1

( a ). The existence of externalities is an important factor which causes market failure and prevents the achievement of efficient production level in the market. Externalities refer to the beneficial and detrimental effects of an economic unit. Negative externalities occur when an economic unit inflicts costs on others for which he does not make any payment. There are many negative externalities involved in commercial fishing.

Generally fishermen who are engaged in commercial fishing try to increase the amount of their catch to the maximum level they can reach. However, it leads to overfishing, and for a considerable duration of time, there are not enough fishes available for catch in that specific area. Such practices by fishermen impose costs on environement in the form of pollution of water and damage to the marine resources and environment.

( b ). If fishermen involved themselves in a collusion to form a cartel so that they could increase the prices of the fishes, it would lead to a significant drop in their total catch of fishes than before, thereby increasing the stocks of fish to a sustainable level. Higher prices after the formation of cartel would also enable them to off-set loss of revenue incurred due to decrease in their total catch than before.