Most commercial fish species in nearly every ocean and sea are being rapidly depleted in what marine biologists and other specialists warn is evolving into one of the worst ecological disasters of modern times. According to the United Nations, the world’s 15 million fishermen and 23 million tons of fishing vessels represent twice as much fishing power as major stocks of fish can sustain. Assume that ocean fishing resembles a competitive market in the following ways: 1. there are no significant barriers to entry and 2. there are enough individual fishermen so that none of them can affect the market price of fish.
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2. Explain why competitive markets normally lead profit maximizing firms to make choices about resource use that lead to an efficient allocation of resources to the market?
2. If unregulated competitive markets promote efficient patterns of resource use, why has unregulated competition led to such serious overallocation of resources to fishing?
Thanks
A) When firms in competitive markets maximize profits by expanding Q until MC= P, they are devoting resources to their highest valued use. (since consumers expand their purchases until MU=P, MU=MC when firms expand Q until MC=P.)
B)In order to maximize profits, monopolists will expand output only until MR = MC. But (MR < P)--since the monopolist faces a downward sloping demand schedule. Meanwhile consumers expand their purchases of the good produced by the monopoly until MU=P. Therefore, in monopolistic equilibrium. MC=MR< P=MU or MC <MU. In other words, too few resources are devoted to goods produced under monopoly conditions
Gaz's answer to the first question isnt too bad, his answer to the second is completely off base; the answer has nothing to do with monopolies. Sorry Gaz.
For the first, profit maximizers will allocate resorces to maximize their profits, which means using the resources to create items which have the highest profit margins (including opportunity costs). Since the resources are going to their highest valued use, and all costs and benefits are fully accounted for, the allocation of those resources is efficient.
Now then, in the case of the fishery, the firsherman does not bear the full cost of catching a fish. With each fish caught, the fisherman is reducing the ability of the fishery to repopulate itself. Equally important, with each fish caught, the fisherman raises the marginal costs for all other fisherman. That is, the fisherman is maximizing according to his own internal marginal costs (gear, fuel, time, etc.). The fisherman does not take into account the externalities he imposes on others. Hence, the fishery is over-fished.
In short, everybody's resource is nobody's resource.
1. Competitive markets tend to lead profit maximizing firms to make choices about resource use that result in an efficient allocation of resources to the market because of several key factors:
a) Price Mechanism: In a competitive market, prices are determined by the interaction of supply and demand. When resources are scarce, the price of a good or service increases, signaling to firms that it is profitable to allocate more resources to its production. On the other hand, when resources are abundant, the price decreases, indicating that less allocation is needed. This price mechanism ensures that resources are directed towards the most profitable uses, resulting in an efficient allocation.
b) Competition and Incentives: In a competitive market, firms compete against each other to attract customers and make profits. To stay competitive, firms need to produce goods or services with the most efficient use of resources. They face constant pressure to minimize costs, improve productivity, and innovate to gain a competitive advantage. This leads firms to allocate resources efficiently, as any wasteful use of resources would result in higher costs and reduced profit margins.
c) Profit Maximization: Firms in competitive markets aim to maximize their profits. They achieve this by considering the cost and benefit of each resource input in their production process. By rational decision-making, firms will choose the combination of resources that maximizes their profits, taking into account both the prices of the resources and the market demand for their products.
2. While unregulated competitive markets generally promote efficient patterns of resource use, the serious overallocation of resources to fishing can be attributed to a number of factors:
a) Tragedy of the Commons: Fishing grounds are typically treated as an open-access resource, where anyone can fish without restriction. This situation often leads to the "tragedy of the commons" - a scenario where individual fishermen have an incentive to maximize their own catch without considering the long-term sustainability of the fish stocks. Each fisherman can benefit from catching more fish, but collectively, this leads to the depletion of fish populations.
b) Lack of Property Rights: In many cases, fishing is carried out in international waters where property rights are not clearly defined or enforced. This lack of exclusive ownership rights means that fishermen do not have an incentive to conserve and sustainably manage fish stocks. They operate under the assumption that someone else will capture the fish if they don't, which further promotes overfishing.
c) Regulatory Failures: In some cases, there may be inadequate or poorly enforced regulations to manage fishing activities. Governments often face challenges in monitoring and regulating the vast expanse of ocean waters. This can result in a lack of effective measures to control fishing effort, such as catch limits, fishing seasons, or protected areas. Without proper regulation, overfishing can continue unabated.
d) Externalities: The overallocation of resources to fishing also arises due to external costs or benefits not accounted for in market transactions. For example, the depletion of fish stocks not only affects the fishermen but also has negative impacts on the broader marine ecosystem and future generations. These external costs do not factor into the fishermen's profit-maximizing decisions, leading to an inefficient allocation of resources.
Combining these factors, the lack of proper regulation, property rights, and the presence of external costs contribute to unregulated competition leading to serious overallocation of resources to fishing, and the depletion of fish stocks.