Question

Suppose that fishing has caused a certain species of fish to be threatened with extinction. After banning fishing for many years, the fish population has rebounded. Now the government is proposing to introduce a system of tradeable fishing permits, which entitles the holder of each permit to catch a given number of fish each year. Explain how uncontrolled fishing led to a negative externality problem and how a system of tradeable fishing permits can potentially overcome the inefficiency caused by this negative externality.

Answer 1

To understand the problem at hand, we first understand what externality is. It is the benefit or the cost incurred by a third party who was not a party to the transaction and didn't choose to earn the benefit or incur cost . These are generally seen to be social in nature and exceed private costs.

Now, negative externality would relate to the unwanted or unaccounted cost incurred by the third parties outside of the market due to the production or consumption of a good. In our case, the environment. With an unchecked and over exploitation of nature under the fishing activities, it lead to a negative externality to the nature in the form of extinction of certain fish species. This also lead to market failure. As seen in this case a complete ban on fishing.

When social costs are beyond expected, they need to be brought down so as to bring it back to an equilibrium point or a sustainably acceptable point. Therefore, in this case to balance cost incurred duo to the over fishing activity, its ban brought a balance in the natural resource. It helped the depleted resourse to replenish.

Now to ensure a longer sustainability and minimum externalities to nature, permit systems seems to be the right choice. With the permit, fishing can be regulated easily. One can maintain a record of the scale and quantum at which the activity is being undertaken. The government can then ensure that corrective action if needed can be taken on time so that the negative externalities do not lead to such drastic outcome of extinction. A permit system will also make the ease in entry of this business difficult, thus keeping a check on the increasing players in the market. Incase of a need of regulation, it may higher or lower the permit costs. This way the government can keep an overall check and maintain balance in the systems.