Welfare measurement in
multimarket bio-economic models or
Applied welfare bio-economics
Niels Vestergaard
Lars Ravn-Jonsen
FAME
University of Southern Denmark
Introduction
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What is welfare economics?
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Welfare economics is a branch of economics that uses
microeconomic techniques to evaluate economic wellbeing, especially relative to economic efficiency and the
resulting income distribution associated with it.
It analyzes in terms of economic activities of the
individuals. The applied welfare economist usually focuses
on ways to increase total economic surplus, ‘the size of the
pie’, or at least to measure changes in the size of the pie.
Tools: Cost-benefit analysis, consumer and producer
surplus, discrete choice models, externalities, taxes etc.
Introduction
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In several marine areas the fishing industry operates on
interrelated market where both exogenous changes and
regulatory changes will have multimarket effects.
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e.g. environmental changes or changes in final demand
e.g. changes in allocation of harvest between different groups
In applied welfare economics these spillover effects have to
be included.
Just, Hueth and Schmidt (1982) developed general
expressions for measuring the total welfare using general
equilibrium surplus changes. Their work was based on
Harberger who showed that using general equilibrium
demand and supply curves will capture the sum of welfare
effects in also related market.
Introduction
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Difference between partial and general approaches
(and the multiplicative method).
In partial approaches changes in economic welfare
are only measured in the affected market, e.g. losses
due to reduced production and consumption and to
increased prices.
In general approaches all the effects are measured, i.
e. feedback effects between other markets.
In applied work a subset of markets is choosen.
These are the most affected markets.
Example
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The reduction of quota for Sandeel in 2012:
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Multiplying current output prices or average profit
with the reduction in quota is not an approriate
measure of the economic loss. It might be a measure
for the reduction in economic activity.
Prices will most likely increase and the firms involved
will adjust their input use and hence the production
cost will also change.
But these changes spill over to other related markets
and in principle, the measurement has to capture the
sum of welfare effects obtained at all markets.
The partial approach
Price
S’
S=Supply
P’
p
A
Loss in Producer surplus: B-A
Loss in Consumer surplus: A+C+D
Net total loss: B+C+D
C D
B
Demand
q’
q
Quantity
Ecosystem examples
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Ecosystem models of living marine resources
emphasize the ecological relationship between
species. And consequently harvest of one species may
have impact on the availability of not only the
harvested species but also on other species. This may
impact the harvesting cost and therefore it can have
welfare economic effects. These kind of effects are
called ecosystem externalities.
An example is the role of forage fish in the ecosystem,
where the forage fish acts as prey, but is also subject
to harvest. And changes in the “predator” fishery may
feedback into the forage fish fishery.
General economic effects of ecosystem:
A multi-market approach to forage fishery
Demand 2
Demand 1
Fleet 2
Fleet 1
Supply
Birds etc.
Piscivorous fish
Climate change
Forage fish
Review
● Thurman and Easley (1992) analyses how allocation of harvest
between two fleets may have wider effects than just on the market
directed affected (i.e. on the first hand or dockside market), namely
on the dockside market for other species and at the retail market.
● Vestergaard (1999) explores the relationship between two
harvesting quota markets using general equilibrium.
● In a recent paper Quaas and Requate (2012) include demand
interactions into a bio-economic model with independent species
and fisheries, i.e. a number of single species fisheries where there is
interactions on the demand side on the market for fish products.
No eco-system effects.
● A large literature has addressed applied welfare economics
problems in other sectors using a general equilibrium approach.
Illustration of the approach:
The simplest possible model
Competitive fishery
Competitive fishery
A comment on industry equilibrium
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In ITQ fisheries the average profit equals the costs
of quota holdings.
And the output price minus quota price is equal to
marginal cost (i.e. virtual price = marginal cost)
price
”Quota
rent”
MC (supply)
p
pv
hc
hu
quantity
Evaluation of changes in stocks
Equilibrium stocks
Changes in surplus
price
S=MC0
S=MC1
P
B
A
h
0
h
1
quantity
Measurement of surplus
Total surplus and distribution
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The changes in total surplus and the distribution
of the surplus between different producers is
determined by:
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The response of stocks to changes in temperature
Ecosystem interaction
Cost functions of the fleets
The regulatory system
In our analysis optimal regulation is assumed.
Under open access the supply function is the
average cost curve and the producer surplus is
always zero.
Sum up
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Changes in economic surplus in ecosystem fisheries due to
policy changes or exogenous changes can be assessed using
equilibrium supply curves.
Changes in one part of the ecosystem spill over to other
parts and these changes have to be included in a general
analysis.
The changes in surplus depends on the regulation system. If
there is no consumer surplus and open access regulation
there is no need to include that fishery because the
changes in producer surplus is equal to zero.
This has been shown in a very simply example.
In empirical work the challenge is to estimate the supply
functions and the relationship between changes in stock
and temperature.