Overfishing (Market Failure)

What are the main causes and consequences of the market failure in fishing?

The main cause of the market failure in fishing is the over-consumption and demand for all varieties of fish and seafood.  This is driven by government subsidies aimed to help the fishing industry as they are a considerable part of the economy, as some towns and cities are dependent on fisherman traffic. Governments are also contributing subsidies in the interest of keep food prices down, in foods such as fish which have become common in global diets.

The consequence of this over-consumption is the clear over-fishing and exploitation of the varieties of fish that can be consumed. There is now a growing dependence on fish farms to supply for the demand of fish.

The central external costs of the supply in fish contributing to market failure are:

  • The eventual extinction of specific species of fish
  • Accidental catch of other unwanted fish, reducing general population
  • Algal blooms, caused by dead fish left in sea and ocean
  • Weakening ecosystems, to near collapse
  • Loss of large fish i.e. Tuna
  • Forced government subsidisation
  • Less beautiful underwater cultures for tourism
  • Depleting natural resources
  • Driving small businesses out

The cause of the over-fishing is difficult to pin on a single source as it is both the demand of consumers, as well as the argument “well there will be no difference if the fish are taken now or in a months’ time”.

There is the developing issue of illegal fishing, even though laws and regulations have been set in place to only allow fishing within certain areas it is costly and difficult to actually enforce these laws and regulations. This issue develops on the point that companies now go to other countries to fish as there are less restrictions on quotas, such as the Senegal example where local fishing business is beginning to be taken by corporations.

A cause of over-fishing can be attributed to the methods used to obtain fish, even though they are the most effective and efficient there is a lot of unwanted catch in fine mesh nets and trawling methods. This is why there is a major breakup in the food chain of the species, and has a residing effect on the ecosystem of the fish whether big or small.

Facts:

Globally, some 75 per cent of wild marine fish are now said to be either fully-exploited or overfished, according to the United Nations’ Food and Agriculture Organisation (UN FAO)

Fish farming, now provides almost half of all the fish consumed by humans.

Development of crime in areas such as Somalia, and Senegal

Have the government solutions to over-fishing made the situation worse?

Overall, it can be argued that the government has not really made a clear attempt for a solution and if anything has made the situation worse. Governments throughout Europe, Asia, and American have made it a prerogative to subsidise the fishing industries.  This is an attempt to keep the industries alive even though they are catching less wanted fish then in the late 19th century and throughout the 20th century.  Governments have made it more worthwhile for fisherman to try and scavenge for what is out there rather than protect fish stocks for the future, and this is what the subsidies have achieved.

In regards to further failure by the government is the inability to abide or follow advice on quotas on the amount of fish that can be fished per day to ensure that there is no complete collapse of a species or ecosystem. Most quotas that governments set range between 20%-40% higher than what scientists advise. There is also the issue of policing this which the government is not completely committed too.  This is because the market failure is heavier on the government and producer side than the consumer. As consumers have not been offered viable alternatives to fish, there is the continued over-consumption.

In a sense government solutions have not done enough as over-fishing is only one cause for the general decline in fish stocks as there is also global warming, and illegal fishing. Global warming has had serious implications on the quality of sea life, and has encouraged the dependency on fish farms to provide common fish. The issue here is that the fish farms still fish to provide smaller fish to larger fish such as tuna.  This has started a vicious cycle which the government has not successfully intervened, and if anything encouraged fisherman to not follow quotas.

There is also the ban of catching certain fish; again this government intervention further contributes to the market failure as it simply makes those fish more desirable. There is also a lower price on farmed fish as they are considered a lesser good than natural fish. There has been no attempt to tax depending on unwanted fish taken, or hand out certain areas of water where companies have to personally decide how to take care of the land.

Facts:

Unfair Fisheries Partnership Agreements that allow foreign fleets to overfish in the waters of developing countries.

The cost of mismanagement, in lost economic output, is huge: some $50 billion a year, according to the World Bank.

 

What action would you suggest to reduce the damage done by overfishing while supporting those who depend on the fishing industry?

There needs to be a clear change in government policy as well as the manner in which fishing is done. There should be a greater stress on achievable regulation, and possibly an increase in prices.

Governments may choose to continue subsidising the fish industry, but should begin to subsidise fish farms that grow all the fish needed to feed bigger carnivorous fish. This will produce self-sustaining fish farms that are no longer reliant on the fishing of small fish to provide feed.

Governments should agree that only local fish is not taxed within a country, so in the case of salmon being supplied in Scotland has no tax, whereas if it was exported to another country there would be an export tax in the country of origin, and an import tax in the receiving country. This would accurately price the cost of the fish, and especially rarer fish.

Industry standards have to change; this can be done by introducing time frames that fishing is allowed within the season. Beyond this if a boat goes out to fish for a week then it may only actively fish on 4 of those 7 days, ensuring that quotas are met not over reached. Also in the equipment used for fishing to ban the use of trawling, and fine mesh nets. The method of trawling has adverse effects to the ecosystems, and fine mesh nets produce a lot of unwanted catch of small juvenile fish therefore further reducing the chances of endangered species.

No fish zones need to be created in areas where the ecosystem has suffered or there is the chance of a fish becoming extinct, this is done today but I would call for an international body to police these zones to ensure there is no illegal fishing whether industrial or local.

For a time temporary bans on certain fish would have to be placed, this would reduce the number of jobs and profitability of the industry, however this ensures job safety in the future by allowing the fish populations to naturally increase without intervention.

Facts:

Restoring these stocks could deliver up to £14.62 billion per year in gross revenues. This is 2.7 times the current (2010) value of their landings

The size of investment required to achieve this is £10.4 billion over the entire transition period (9.4 years) – £9.16 billion in present value terms

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Minimum Wage (Harkness)

 

Discuss arguments for and against a national minimum wage

For:

  • Sets the living standards for the country, and also establishes what should be expected from the state. It gives a representation of the type of income one needs to live within the country
  • Ensures that employees are not being exploited by private companies
  • Generally improve the income of workers
  • Does not rely on the demand  and supply of labour

Against:

  • National minimum wage may cost jobs, as employers may not be able to afford hiring as many employees as needed
  • Does not solve the issue of those unemployed whom are still a burden on welfare states
  • Difficult to decide what a national minimum wage should be in proportion to, as 50% of average income is not always a reliable indicator
  • If the minimum wage is too low it may undermine the employees ability to sustain a living

Should National Minimum wage be raised or lowered?

Raised:

  • If the minimum wage was to increase this would lessen the burden on the state to give welfare.
  • The poor tend to spend a higher portion of their income, with the increase of minimum wage there can be increased savings, and greater monetary flexibility.
  • Since the state provides welfare for those unemployed and those with low-level salaries, it in a manner subsidises the businesses. If minimum wage were to be raised the employers owe more to the worker rather than the government.
  • People rather take benefits than an unsecure job at minimum wage, so if the minimum wage were increased there would be a greater incentive to get a job.
  • If it is lower than people will begin to struggle as almost all of their income is used up in basic necessities and families will have to have two working parents which may lead to the need for more welfare.

There is speculation that tighter control of wages simply means the economy is no longer as free and that labour within certain countries is less competitive, however it can be noted that countries such as China who have an export based market are increasing the minimum wage of employees considerably.

Discuss the possibility of an International Minimum Wage?

There are several problems with the concept of an international minimum wage. Firstly, the minimum wage would be subject to value of currencies and foreign exchange market. The second issue would be the fact that the cost of living is different in every country. Finally, not all countries offer welfare and the minimum wage set may not be enough to sustain a family or basic lifestyle.

If an international were to be set it would be as problematic as setting a single currency for multiple countries, there are both pros and cons. In the case of minimum wage it would become problematic if a certain currency was worth more than another currency which is the case globally when comparing all the varieties of currency.

The cost of living changes drastically from country to country, and even from state to state in the U.S. If a person were to move from San Francisco (CA) to Manhattan (NY) 28% increase in cost of groceries and a 57% increase in cost of utilities.[1] This is why in the United States there is a federal minimum wage, but states can increase the minimum wage e.g. Illinois, Connecticut, & Nevada. This current example clearly represents why it would be difficult to introduce an international minimum wage without effective policies to support it, which is difficult to do internationally.

Countries such as the United Kingdom offer a variety of welfare services, whether it is tax exemption or healthcare. The majority of countries outside of Europe don’t have such comprehensive welfare systems, therefore if an international minimum wage is set those in Europe on minimum wage are in a far better position than others. The concept of an international minimum wage is to increase equality, and stop exploitation in LEDs.  However it would be difficult to enforce, and on what factor would the wage be decided on.

While in class we brought up the issue of competition. If there was an international minimum wage then every country would be equally competitive for the price of labour. It is important to note that country’s do not want to move over to a high minimum wage as it may deter producers, as they rather produce for a cheaper price improving their profit margin on products. But if there was to be an international wage it would ensure that people were not being exploited in any specific region. It would be difficult to speculate what affects an international minimum wage would have on the global economy, as it could cause the creation of a black market for labour.

Discuss whether regional variations to the National Minimum Wage are a good idea

Politically it is difficult to explain variation of minimum wage within a country, as the argument would be that there is a greater cost of living within a certain area, therefore establishing that there is serious inequality within the country. Economically, variation to minimum wage with respect to region is logical. As noted in the example of the United States, were each state is allowed to set its own minimum wage as long as it is greater than the federal minimum wage. In England the cost of living is greater in remote areas due to the reliance on personal transportation (driving) and the lower supply of basic goods. Therefore, it would only make sense if the minimum wage for that area was increased.

Command Economy Vs. Free Market (Round 2)

Discuss the advantages and disadvantages of a free-market economy:

Advantages:

  • Price Mechanism:

Through free market concepts such as price signal and opportunity cost, the free market supplies a method of pricing resources without government intervention. An example being if there is great demand for a resource and it is scarce price rises, and vice-versa.

  • Self-Adjustment (equilibrium):

Resources are basically allocated by the supply and demand relationship, if there is a demand for a resource then someone will look to make profit and provide a supply. However the market ultimately decides the price, and self-adjusts so unless there is a sudden change in supply or demand theoretically there will be no shortage or surplus.

  • Human Psychological Aspect:

Each person effectively looks after themselves; there is that necessity of personal gain to feel progress is being made to achieving happiness.

We have been brought up to believe that the way to gain is to obtain employment, therefore earning money, allowing us to express effective demand over wants and needs.

  • Competition:

The free market allows the creation of competition which suits the consumer; people like to have options this therefore creates space for producers to create better products cheaply aiming to achieve a greater hold over the market.

Disadvantages:

  • Speculation & Bubble:

The free market can allows certain resources to be over-valued on false pretences, factors such as insider information or industrial espionage can lead to price surge or crash. A superficial bubble can be produced, as a certain resource should crash but people are continually trying to keep it up.

  • Undervaluation of Needs:

Since there is a concentration on immediate gain and short term perspective through the free market, important services such as education and health tend to be undervalued by consumers. In a utopian free-market these services would be accurately priced, but this does not occur in reality.

  • Monopoly & Duopoly:

If a producer gains to great of a market share they begin to control prices themselves, which leads to the failing of the pricing mechanism and the supply/demand relationship. This is against the interest of the consumer, and misallocates resources. An example of a prominent duopoly situation is Airbus vs. Boeing.

 

Discuss the advantages and disadvantages of a command economy:

Advantages:

  • Planned & Greater Predictability:

In a command economy the government sets production and growth targets, there is an idea of the bigger picture on how the economy will perform in the future. This theoretically increases the economic stability, such as maintaining the value of a currency or given resource (less volatile, fluctuation a rare occurrence)

  • Elimination of Opportunity Cost:

Since the government allocates the resource the consumer does not question the practicality or use of a given resource, this usually takes the form of coupons. The consumer does not lose out the ability to consume another resource when a coupon is used as it only works for a certain resource.

  • Valuation of Services (education, health, etc.):

There is the organisation of a social health and education system, ensuring that everyone can attend school and receive an education as well as ensuring that people are medically taken care of.  This stops people from thinking in the short term, and the government is allowed to independently decide the value of education (i.e. the creation of an education budget).

  • Reduction of Inequality:

The government decides on how the country’s wealth is distributed, in theory this stops anyone from having more money than they “need”.  This allows people with service jobs to still have food, healthcare, and education. This achieves social justice as those with jobs such as janitors are valued workers.

Disadvantages:

  • Misallocation of Certain Resources:

The government will not always know how much to give or produce of a certain resource. For the government to effectively allocate resources in this situation it must have large amounts of information on the populace of the country. This also raises the question does a doctor deserve more or equal to someone of a lesser profession such as a cleaner.

  • Lacking Innovation (no choice or variety):

There is only ever the production of one type of product, as it becomes a national brand as if there could only be Marlboro Cigarettes and Colgate toothpaste. This means there is no competition which leads to a lack of innovation.

  • Shortages & Surplus

When the government misallocates resources, it may decide to change production of the resource. The problem with this aspect may lead to too little of the resource being produced or too much, this is because it is difficult to understand consumer demand.

  • Efficiency
    • The free-market handles itself, whereas the command economy requires people to regulate all aspects and control it. This means that the producers lack profit motive and see no reason to “work harder” but to simply meet the quota.

What is the optimal level of government intervention and what does it depend on?

When looking at the role of the government in economics it is important to separate regulation and intervention. As such government regulation is a necessity, it allows us to have control to ensure that the economy serves everyone best interest.

Regulation can take form in any manner, but is in the interest of the government to provide regulation that does not hinder innovation or competition. However, it is equally important that regulation ensures that monopolies do not occur, as it does not serve the general public interest. Regulation is also important when factors such as the environment are involved, as it is in the general public’s interest to live in a healthy environment. Therefore, regulations on pollution levels are put in place and fees are introduced such as carbon tax to impose the regulation.

The government should rarely truly intervene in the economy, granted for situations such as economic collapse or hyperinflation the government must act. The situation needs to be truly dire for the government to intervene but what is more important is how the government intervenes. Allowing some aspects to fail is of great importance as it shows what must be changed; this is opposite to what governments did during the 2007-2008 financial crises where the British government decided to buy into the failing banks essentially de-privatising them.

The inclusion of government and the role of central banks is a controversial and debatable topic. There is no right or wrong as such, and every country needs a different mixture between government control and regulation and the allowance of a free market.

 

Command Economy Vs. Free Market (Round 1)

Winter Is Coming, and The Soviet Cupboard Is Bare

http://www.businessweek.com/stories/1991-11-03/winter-is-coming-and-the-soviet-cupboard-is-bare

International Business

WINTER IS COMING, AND THE SOVIET CUPBOARD IS BARE

Tensions are running high at Moscow’s sprawling Gastronom food store near Byelorussia Railway Station. With coupons ready, two dozen people are lined up at the counter to get sugar rations they were supposed to have had three months ago. Management claims there’s no sugar–but it turns out that 20 sacks of sugar have been hidden in the back. For hours, the angry crowd refuses to leave, forcing police to clear the store when closing time comes at 8 p.m.

As winter approaches, such scenes are becoming common. The question being asked in capitals from Brussels to Washington is: How bad will it get in the former Soviet Union? Mass starvation is unlikely. But a combination of poor harvests and breakdowns in food distribution will mean pockets of serious shortages throughout the country. The repercussions are being felt on world commodity markets. Plans are afoot for the U. S. to extend $1 billion in emergency food credits and aid, prompting American grain prices to shoot up.

Across the Soviet Union, cities loom as the most vulnerable spots. Perm, an industrial town in the Urals, already witnessed major protests when sugar supplies dried up. In Moscow, frustrated tipplers ransacked a liquor outlet that had no vodka. In Alma Ata and St. Petersburg, bread is running short. Most at risk are retirees, who struggle along on pensions of 140 rubles a month and can’t afford the plentiful but expensive food in private markets.

The biggest immediate threat is a poor grain harvest, which many expect to come in at 170 million metric tons–down 22% from last year. Of that amount, about 70 million metric tons were to have been sold to state distribution agencies run by Moscow. But in the aftermath of August’s failed coup, central authority has all but evaporated, allowing state and collective farms to sell what they please. By Oct. 1, they had sold only 35.4 million metric tons to the government.

The rest is being hoarded by farmers in hopes of selling it privately later at higher prices. Since spring, for example, grain prices have jumped from 900 rubles to 2,000 rubles a ton. And with the ruble losing value by the day, farmers are using grain to barter for consumer goods, cement, or other items they need.

Yet state and collective farms do not have adequate storage facilities and may face big grain losses, as Vladimir A. Tikhonov, a Soviet agricultural expert, told an Oct. 18 conference at the Geonomics Institute of Vermont’s Middlebury College. The resulting shortages could touch off food riots by spring, he says.

RUMBLING BELLIES. In Russia, the most populous republic, food supplies are tight. Meat purchases for the first nine months of the year were down 20%, and dairy sales sank 15%. In more than 50 Russian cities, meat, butter, and vodka are being rationed.

Finding additional supplies will be difficult. Now that they’ve declared their independence, such food-producing republics as Moldavia, the Baltic states, the Ukraine, and Kazakhstan are reluctant to ship food to Russia, since they want to feed their own people first. Russian cities in the heavily industrial Urals region, for example, used to get livestock from the Baltic states. But shipments have fallen off dramatically. The republics are supposed to adhere to their commitments to sell food or pay penalties in hard currency. But, says Tikhonov, “a period has come when no agreements can be relied upon.”

Western countries, fearful of the chaos that food shortages could spawn, are gearing up with emergency plans. The U. S., Japan, the European Community, and Saudi Arabia have earmarked $10 billion in aid and credits primarily for food. But last year, when the situation was less than dire, the Soviets cried wolf: Much of the emergency food aid sent by the West ended up wasted or absorbed by the black market. The question now is figuring out how to send help when it’s really needed–and before it’s too late. Rose Brady in Moscow and Peter Galuszka in Middlebury, Vt.

Questions:

How is the basic economic problem being handled by the use of coupons? Why might this be less successful than money?

The coupons are in a way a different form of currency for the people and businesses, since the coupon is being exchanged directly for a given product. Through the use of coupons there is the elimination of opportunity cost, as a coupon only entitles you to one given product. The reason this may be less successful than money is because the value of the product may increase as there is a shortage of supply, but a coupon entitles the person to the same amount of the product as before. This encourages those with the product to hoard it and sell it on the black market for immediate monetary gains and a greater profit then would have been received if the coupons were taken.

Suggest reasons why there may be a shortage of sugar?

  • The main reason there is a shortage of sugar is because the producers are hoarding the sugar. There are two markets in existence the black market and the coupon market. The producers rather sell in the black market to increase profit rather than sell in the coupon market, therefore the creation of shortage.
  • Another possible reason is that product is being used to barter for other product, this direct trade skips the use of coupons or the black market therefore not establishing a supply.
  • The final reason for a drop in supply would be the independence of former Soviet Union states not exporting their product

Use demand and supply diagram to explain why there is a shortage of some foodstuff.

Use a demand and supply diagram to demonstrate the surge in the price of food.

Does the article demonstrate the failing of the command or free market based solutions to the basic economic problem?

To an extent the article highlights what occurs when there is an economic transition from one system to another. The main issue that the article highlights is the undermining of the command economy system with the use of the black market. In essence the black market is a free market without regulation but with similar aspects such as equilibrium and price signals. The article mentions an immediate threat with the poor grain harvest, and the resulting surge in prices; this is not entirely an issue that only a command economy would face but also a free market economy. An example of this occurring in free markets can be noticed often when there is scarcity of a resource, what a command economy attempts to do by rationing is to reduce the issue of scarcity.

What can be noted about the transitioning economy is the behaviour of the sellers of commodities. Since there is no longer the regulation forcing them to give their produce to the government they are free to do with it as they like. So immediately they go for the short-term positive personal gain, rather than thinking about the greater community. This is why the black market prospers at this time, because the profit margin for selling in the black market is much greater than the margin in the transitioning economy; this relates back to the issue of the coupons.