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Calculation of profit maximization equilibrium and Fisheries Policy

This is a complex question of four parts. Please do not pick up the question unless you can specifically help me address all sections.

1. Please refer to the Excel spreadsheet that is in the folder for this question. It contains three relevant tabs at the bottom?Fishery, Graph, and Boats. As you can see it depicts a fishery with a specific relationship between fishery effort (measured in horsepower) and the total costs and revenues (measured in millions of dollars).

a. What is the profit maximizing level of effort (horsepower) for this fishery? What is the profit at this level of effort? Remember what the conditions are for profit maximization in a fishery.

b. The fishery is currently operating at the "open access" equilibrium. What level of horsepower is currently being used in the fishery? Hint: This requires a tiny bit of algebra.

c. The regional government wants to employ an ITQ system to move the fishery from the open access equilibrium to the profit maximization equilibrium (which will also promote the sustainability of the fishery). What is the minimum amount of money it needs to raise through the sale of permits in order to buy out enough fishers to reduce horsepower to the desired level? Hint: I've provided all the data you need in the "Boat" sheet but you're going to want to create a 4th column (and you'll also need some of the data from parts a&b).

d. What can you say about the types of boats remaining after the buyout? Why might some people be concerned with this outcome?


Solution Preview

See attached excel file for calcs:

A) MR = -2HP + 6
MC = 1.2
Setting MC = MR
1.2 = -2HP + 6
HP = 2.4

Profit = TR - TC
Profit = 5.76

See cells G1-G5 for calcs + I added MR and MC columns
See G6-G8 and ...

Solution Summary

Calculations of profit maximization equilibrium and open access equilibrium in Fisheries Policy.