Welfare economic concepts in fisheries economics:
Definitions and implications of inconsistent use12
Frank Jensen1, Max Nielsen1, Hans Ellefsen2 and Niels Vestergaard3
1. Department of Food and Resource Economics, University of Copenhagen, Denmark
2. Department of History and Social Sciences, University of the Faroe Islands, Faroe Islands
3. Department of Environmental and Business Economics and Center for Fisheries and Aquaculture
Management and Economics, University of Southern Denmark, Denmark
Keywords: Resource rent, Producer surplus, Consumer surplus and Welfare.
JEL classification: D61, D62, Q22, Q28
Abstract: In this paper, resource rent, producer surplus, consumer surplus, infra-marginal rents,
welfare, socio-economic rent and profit are defined based on general economic theory. There is
widespread agreement about the definition of these basic concepts in both classical and recent
micro/welfare economic textbooks. However, by investigating several seminal articles and one
recent academic discussion within fisheries economics, we show that many fisheries economists
use these concepts in an inconsistent or superficial way. Often, welfare is defined without
including producer surplus and consumer surplus and, in addition, fisheries economists do not
distinguish between actual costs (profit) and opportunity costs (resource rent). However, the lack
of agreement about a common definition of the concepts is only a problem if it influences the size
of welfare. Based on an extensive literature review of empirical studies, we show that producer
surplus, consumer surplus and resource rent have a significant value within fisheries. In addition, it
is important to draw a distinction between profit and resource rent. The implication of these
results is that recommendations about fisheries regulation can gain much from a more consistent
use of welfare concepts.
1
The corresponding author is associate professor Frank Jensen, Department of Food and Resource Economics, Faculty
of Science, University of Copenhagen, Rolighedsvej 23, DK-1958 Frederiksberg C, Denmark, e-mail:0, phone no. +45
35336898. Financial support for the paper was provided by the Nordic Council of Ministers, Nordic Committee of
Senior Officials for Fisheries and Aquaculture, Agriculture, Food and Forestry. However, the results in the paper are
solely the responsibility of the authors.
2
We thank Jette Bredahl Jacobsen, Bo Jellesmark Thorsen and Hans Frost for valuable comments on earlier drafts of
this paper.
1
1. Introduction
In all scientific disciplines, a common definition of core concepts used is important. Without a
common understanding of core concepts, the result of scientific investigations is impossible to
interpret and compare. If, for example, economists use different definitions of welfare when
market failures exist, the efficiency of policy solutions to solve these failures may depend on the
definition of welfare.
To characterize a social optimal resource allocation, economists use concepts like producer
surplus, consumer surplus, welfare, socio-economic rent, and profit. In basic micro/welfare
economic theory, most economists agree on the definition of these concepts and in this paper this
agreement is illustrated by including classical textbooks (see Henderson and Quandt, 1980,
Broadway and Bruce, 1984, Varian, 1992 and Varian, 1987). However, the agreement about the
definition of optimality concepts can, also, be found in recent textbooks (Boyes and Melvin, 2013,
Nicholsen and Snyder, 2012, Feldman and Serrano, 2006 and Katzner, 2008). Thus, consensus
about the definition of optimality concepts has existed for a long time in general economic theory.
However, such an agreement about the definition of optimality concepts cannot be found in the
fisheries economics literature where various authors use different definitions of welfare. The
fisheries economics discipline may benefit from a common agreement on optimality concepts
because this may lead to more consistent policy formulations and recommendations.3 For
example, the level of maximum economic yield (MEY) will be more consistently defined if there is
common agreement on optimality concepts.
The purpose of the present paper is to propose a common definition of concepts for measuring
welfare within fisheries that is consistent with general economic textbooks. We define resource
rent, producer surplus, consumer surplus, infra-marginal rents, welfare, socio-economic rent and
profit. Next we illustrate the disagreement among fisheries economists regarding the definition of
optimality concepts by interpreting the definition of welfare in several seminal papers and one
recent academic discussion within fisheries economics. The welfare measure we propose for
fisheries includes resource rent, producer surplus on factor markets and consumer surplus on
3
A consistent definition of welfare policy recommendations from fisheries economists would make the result easier
to understand for people outside the economics discipline.
2
output markets. In addition, we argue that opportunity cost (resource rent) and actual cost (profit)
may differ. In many classical papers, producer surplus and consumer surplus are excluded from
welfare, while profit and resource rent are assumed to be identical. However, the discussion about
an inconsistent use of optimality concepts is only relevant if the various components of welfare
have a reasonable size. In this paper, we therefore also examine the size of the various
components of welfare using existing empirical fisheries economics literature. We show that
consumer´s surplus, producer surplus and resource rent have a significant size and that
opportunity cost differs from actual costs. Therefore, the inconsistent use of welfare concepts may
potentially have a significant influence on policy recommendations.
1.1. Methological approach
In the following section, we justify the methodological approach applied in this paper by discussing
seven sets of issues. First, perfect competition on all factor markets in an economy implies that
marginal actual costs are identical to marginal opportunity costs. However, assuming perfect
competition on factor markets in fisheries is not reasonable. On labor markets, for example, utility
of being a fisherman, geographical immobility and lack of skills for alternative employment exist,
which implies that marginal actual remuneration of labor differs from the marginal opportunity
cost of labor. For the capital market, for example, uncertainty with respect to future earnings
exists implying that the required marginal yield of investments in fisheries differs from the
marginal yield on investments in other sectors of the economy. With market failures on factor
markets a distinction between resource rent and profit is important; therefore, this is the starting
point of the present paper.
Second, concepts for measuring welfare can be defined using both partial equilibrium theory (see
Marshall, 1948) and general equilibrium theory (Walras, 1954). Partial equilibrium theory focuses
on a subset of an economy, for example, a specific market, while general equilibrium theory
constructs a model for, for example, a whole sector of the economy and, thereby, analyzes
interactions between markets. The approach that is selected may have implications for the
definition of optimality concepts (see Baumol and Oates, 1988).4 However, the choice between
4
Different definitions of welfare with a partial equilibrium model and a general equilibrium model can be illustrated
by considering a traditional firm that produces one output using labor as the production factor. Assuming that we
3
the two methodologies is often determined by the nature of the topic analyzed. Regarding
concepts for measuring welfare, these are the simplest to define when mixing general equilibrium
theory and partial equilibrium theory and therefore this method is chosen in the present paper.
However, with this choice there is a risk that some important concepts will be missing from the
discussion, but the concepts we define (resource rent, producer surplus, consumer surplus, inframarginal rents, welfare, socio-economic rent and profit) seem to cover all the main concepts for
measuring welfare in modern economic theory. Therefore, the choice of mixing partial equilibrium
theory and general equilibrium theory seems to be well justified.
Third, both an equilibrium approach and disequilibrium approach can be used to define welfare
concepts within fisheries (see, e.g., Clark and Munro, 1975). In reality, fisheries are never in
equilibrium, but are, at best, on an adjustment path towards a steady-state equilibrium (see
Squires and Vestergaard, 2013). This implies that welfare ought to be defined using a
disequilibrium approach. However, despite this we use an equilibrium approach in this paper for
two reasons. First, measuring welfare using a disequilibrium approach is extremely complicated.
For example, on an adjustment path towards equilibrium, resource rent is constantly changing.
Second, the definition of core concepts using an equilibrium approach and disequilibrium
approach is identical. For example, consumer surplus is defined as the area under a demand curve
irrespective of whether we are in a steady-state equilibrium or on an adjustment path towards this
equilibrium.
Fourth, apart from the welfare concepts investigated here, other rent concepts exist in the
literature and these include pure economic rent, quasi-rent, scarcity rent, differential rent,
Ricardian rent and productivity rent. All these concepts come from classical economics theory (see
van Kooten and Bulte, 2000 for a definition and discussion of these concepts). However, in this
paper these rent concepts have not been included because we focus on welfare as commonly
defined in modern economics. The concepts included must, therefore, capture welfare as defined
in normal welfare economics.
focus on the output market in a partial equilibrium model, welfare is the sum of the producer surplus and consumer
surplus on this market. However, with a general equilibrium model, producer surplus and consumer surplus on the
labor market exist. Thus, measuring welfare by the two approaches can yield different results.
4
Fifth, welfare is defined as the sum of producer surplus, consumer surplus and resource rent in
association with traditional fishery. This implies that welfare only includes the net benefits of
harvesting and consuming fish. However, several other social benefits arise from fish including
social gains from biodiversity and ecosystems but these additional social benefits are disregarded
because we focus on welfare as commonly defined within fisheries. According to a normal
definition, welfare is the sum of producer surplus, consumer surplus and resource rent connected
with traditional fishery.
Sixth, according to basic economic theory, a distinction between total value and marginal value is
important and this is also relevant for the present paper. When applying total value, the policy
that maximizes total welfare should be selected, but in this case excluding, for example, consumer
surplus may have important consequences. However, in marginal units the optimal policy occur
where the marginal net welfare is zero and the marginal consumer surplus is so small that it does
not influence optimal policy decisions. Within fisheries it is common to use a total value and,
therefore, this is chosen in this paper, which implies that excluding consumer surplus may have a
significant influence on policy.
Last, we note that both producer surplus and consumer surplus is defined using an opportunity
cost concept but empirical studies define these concepts using actual costs (see section 4). One
suggestion is now to calculate these surpluses by subtracting the surpluses found by using actual
costs from the surpluses using opportunity costs. However, despite this fact we use actual cost to
find consumer surplus and producer surplus empirically. This is chosen because it is common in
economics to hold all other factors constant when investigating the effect of one factor. Thus,
when determining the size of producer surplus and consumer surplus it is normally assumed that
actual costs are equal to opportunity costs. In addition, an Utilitaristic specification of the welfare
function is used and with this welfare is the sum of resource rent, producer surplus and consumer
surplus. An additive separable welfare function implies that the effect of a difference between
actual cost and opportunity cost can be separated from producer surplus and consumer surplus.
The rest of the paper is organized as follows. In section 2 we define various concepts for
measuring welfare in fisheries economics, while section 3 discusses the inconsistent use of
optimality concepts in the fisheries economics literature. The size of various welfare components
5
is investigated in section 4 and the main results in the paper are discussed in section 5. Section 6
presents the conclusion.
2. Definition of concepts
In the following subsections (section 2.1.-2.7), we define the concepts mentioned in the
introduction by using classical textbooks on micro/welfare economics. This is followed by graphical
illustration of resource rent, consumer surplus, producer surplus and welfare (section 2.8).
2.1. Resource rent
When defining resource rent, opportunity cost is an important concept. Opportunity cost is the
value of a production factor, such as labor or capital, in the best alternative use (see, e.g.,
Broadway and Bruce, 1984). Thus, the opportunity costs of using a production factor in fisheries is
the value that this factor can generate in other sectors of the economy.5 For capital, the
opportunity cost is the yield on investments in the most profitable alternative use, while the
opportunity cost of labor is the wage in the best alternative use in the economy. Having defined
opportunity cost, we can define total resource rent as the difference between total revenue and
total opportunity costs evaluated based on an assumption about homogeneous fishermen. The
resource rent is illustrated in Figure 1.
Figure 1: Resource rent and producer surplus.
In Figure 1, TOC1 is the opportunity cost of effort, E6, calculated based on an assumption about
homogeneous fishermen, while TOC2 is the opportunity costs of effort with heterogeneous
fishermen. Thus, TOC1 and TOC2 only differ when fishermen are heterogeneous with respect to
use of effort. Now we may define the optimum, E*, as the effort level where the difference
between total revenue, TR, and TOC2 is greatest. Thus, at E*, the resource rent is maximized.
Under open-access, free entry and exit leads to the exhaustion of the resource rent (point A in
5
The issue of production factors in the best alternative use raises basic problems. Below we argue that market failures
arise for labor and capital markets within fisheries. The implication of this is that the remuneration of production
factors differs between industries. Consequently, the choice of industry for measuring opportunity cost becomes
important.
6
In Figure 1, it is assumed that fishing effort is the only production factor used in fisheries (an assumption which we
discuss below).
6
Figure 1) and, therefore, the production factors receive the same payment as in other sectors of
the economy under open-access.
2.2. Producer surplus
Using general equilibrium theory, the total producer surplus in an economy is the sum of producer
surpluses on all factor markets and output markets (see Henderson and Quandt, 1980). Therefore,
in an economy with only one production factor and one output, a producer surplus on both the
factor market and the output market exists. In an output market, producer surplus is defined as
the rent on all infra-marginal units of output evaluated at the market price.7 Thus, producer
surplus is the difference between what a firm is willing to sell the output for, and what is actually
received for a good (the market price) for all units of output produced (see Varian, 1992). From
this it follows that producer surplus is the area above a supply curve evaluated at a given price
This implies that a positive producer surplus on output only exists when the supply function has a
positive slope, which means that the marginal cost function must be increasing in output (see
Varian, 1987). With constant marginal output costs, no producer surplus can arise.
A producer surplus may also arise on a factor market. In this case, the producer surplus is the
difference between the factor price and the actual gain on all infra-marginal units of a production
factor (see Varian, 1992). Alternatively stated, the producer surplus for a production factor is the
area above a factor supply curve evaluated at a given factor price. Note that producer surplus on
factor markets is defined using an opportunity cost concept and, therefore, production factors are
evaluated using the factor price and the actual gain in the best alternative use. Thus, the producer
surplus for a production factor is the rent above the surplus obtained for a factor in other sectors
of the economy. Let us now distinguish between the cases where a production factor is
homogenous and heterogeneous. If the production factor is relatively homogeneous, the
difference between the gain on marginal and infra-marginal units of the factor is small and,
consequently, the factor supply curve is flat. In contrast, if a production factor is relatively
heterogeneous, the difference in the gain on marginal and infra-marginal units is large and the
factor supply curve is steep. From this it follows that for a totally homogenous production factor,
the actual gain and factor price will be the same for all units of the factor. Consequently, no
7
Infra-marginal units are all units of output below the marginal (last) unit.
7
producer surplus exists with a totally homogenous production factor. However, if a production
factor is heterogeneous, infra-marginal units of a production factor can earn a producer surplus.
Therefore, a condition for the existence of a positive producer surplus on a factor market is the
presence of heterogeneous production factors.
Fishery economists often consider fishing effort as the only production factor. In addition, it is
common to include producer surplus on effort markets, but to disregard it on output markets (see
Copes, 1972).8 In this paper, we will follow this tradition and, therefore, only consider producer
surplus on effort markets. Producer surplus on effort markets can also be illustrated using Figure
1. Provided effort is heterogeneous, the difference between TOC1 and TOC2 at E* is a measure for
the marginal producer surplus. Note that when effort is homogeneous, TOC1 and TOC2 collapses
into line given by TOC1 and, thus, no producer surplus on effort exists (the factor supply curve is
horizontal).
2.3. Consumer surplus
As for producer surplus, consumer surplus may exist in both factor markets and output markets.
Henderson and Quandt (1980) show that the total consumer surplus in an economy is the sum of
consumer surpluses on all factor markets and output markets. With only one production factor
and one output, consumer surplus on both the factor market and the output market arises. For a
production factor, the consumer surplus is the difference between a firm´s willingness to pay for a
production factor and the market price for the factor on all infra-marginal units (see Broadway and
Bruce, 1984). In other words, consumer surplus for a production factor is the area under a factor
demand function evaluated at a given factor price. If the factor demand curve is a horizontal line,
no consumer surplus arises, while a consumer surplus exists when the factor demand function is
negatively sloped.
For an output market, consumer surplus is the difference between a consumer´s willingness to pay
for the output and the market price for all infra-units (see Varian, 1992). In other words, the area
under an output demand function evaluated at a given price is the consumer surplus. When a
negative sloped demand function for an output exists, a positive consumer surplus arises. In
8
This is in line with partial equilibrium theory since the factor market and the output market are treated separately.
8
contrast, if the demand function is a horizontal line (a constant price) a consumer surplus for
output does not exist.
Fishery economists normally disregard consumer surplus on a production factor (effort) and, in
addition, often assume a constant demand price. Thus, for fisheries it is often claimed that no
consumer surplus arises at all (see Clark 1990). If a consumer surplus is included, an analysis of
fisheries will assume that this surplus arise on the output market (see Copes, 1972). Note that
consumer surplus is also defined using an opportunity cost concept and, therefore, the consumer
surplus for the output is the additional utility that could have been obtained by consuming other
goods for a given income.
2.4. Infra-marginal rents
Infra-marginal rents are rents on infra-marginal units which may arise on both output markets and
factor markets. According to general economic theory, producer and consumer surplus on all
factors markets and output markets are infra-marginal rents. For fisheries, infra-marginal rents are
the possible producer surplus on the effort and the potential consumer surplus on the output
market. If effort is totally homogenous, infra-marginal rents only consist of consumer surplus on
outputs, while producer surplus on the effort market is the only infra-marginal rents if the output
price is constant. No infra-marginal rents exist if effort is homogenous and the output price is
constant. Note that for fisheries, infra-marginal rents arise on different markets because producer
surplus exists on the effort market, while consumer surplus occurs on output markets.
2.5. Welfare
Having defined resource rent, producer surplus, consumer surplus and infra-marginal rents, we
can now define welfare and the two approaches exists for identifying this. The first approach is to
define a welfare function with the utilities of individuals in a given society as arguments (see
Broadway and Bruce, 1984). Individuals in a society consist of both consumers and producers. For
consumers utility is directly related to the consumption of goods. However, producers earn profit
which can be used to buy consumption goods. The consumption of goods generates utility for the
producers and, therefore, a utility arises for both consumers and producers. Two common
specifications of a welfare function are the Utilitarian and Rawlsian (see Broadway and Bruce,
9
1984). The Utilitarian welfare function state that the welfare in a society is the sum of the utility of
all individuals, while according to a Rawlsian specification, welfare is the utility of the individual
with the lowest utility.9 In a society, the objective is to maximize welfare, but a production
possibility frontier is a restriction on this maximization problem (see Broadway and Bruce, 1984)
and this frontier expresses the technological possibilities in a given society.
The second approach, which is applied in this paper, is to define welfare as the sum of rents and
surpluses in a society. According to this approach, welfare is the sum of resource rents, producer
surplus and consumer surplus for fisheries. Three considerations are worth mentioning in
connection with this definition. First, defining welfare as the sum of resource rents, producer
surplus and consumer surplus implies adoption of a Utilitarian specification of the welfare
function. Second, by including resource rents, producer surplus and consumer surplus, welfare
arises for both consumers and producers. Third, in empirical analyses of welfare in fisheries, it is
often difficult to distinguish between resource rent and profit, and this can be illustrated in Figure
1. If the marginal cost curve is increasing (TOC1), the producer surplus cannot be separated from
resource rents.
If effort is totally homogenous, welfare in fisheries only includes resource rents and consumer
surplus, while resource rents and producer surplus constitute welfare when the output price is
constant. Welfare is defined as resource rents if effort is totally homogeneous and the output
price is constant. However, in the last case (homogeneous effort and constant output prices),
equilibrium problems do not arise. On factor markets, a negatively sloped demand function may
exist, while we can have a positively sloped supply function on output markets. This leads to an
equilibrium on both effort markets and output markets, even though effort is totally
homogeneous and the output price is constant.
Resource rent maximization is sometimes assumed when attempting to identify an optimal
regulation for fisheries (see Clark, 1990). However, if we have heterogeneous effort and a
negatively sloped demand function, this is inconsistent. When finding optimal regulation we must
also include producer surplus and consumer surplus. Notice also that a common argument is that
open-access exhausts all rents due to free entry and exit (see Andersen, 1979). However, in open9
Therefore, the Rawlsian function is sometimes labeled the maximin welfare function.
10
access a consumer surplus and producer surplus may also exist (see Figure 2 below) and therefore,
welfare will in general be positive under open-access. It is also useful to consider a fishery with a
harvesting sector, an intermediate sector of secondary firms and final consumers (a value chain).
Both a resource rent and producer surplus on effort markets may then arise in the harvesting
sector and, in addition, a consumer surplus exists for the final consumers. However, the
intermediate sector may also generate a producer surplus and a consumer surplus. The total
welfare with a value chain is the sum of the resource rents, producer surplus and consumer
surplus for all actors. Thus, the surplus generated in the secondary industry must also be included
in welfare.
2.6. Socio-economic rent
Public revenue from, for example, auctions of individual quotas is normally not included in welfare
(see Broadway and Bruce, 1984) because this revenue is considered a transfer from fishermen to
the public sector. Transfers are generally not included in welfare (see Broadway and Bruce, 1984)
because no utility gain or loss arises with these. However, the inclusion of public revenue in
welfare leads to the definition of socio-economic rent10 which is a well-established concept in
general economic theory (see, e.g., Broadway and Bruce, 1984). Formally, socio-economic rent can
be defined as welfare which includes public revenue and the concept can be justified by the
double-dividend argument. This argument states that public revenue from correcting a market
failure (open-access) can be used to reduce the size of distortionary taxes (income taxes); see
Brendemoen and Vennemo (1996). Therefore, a real utility gain arises with public revenue which
should therefore be included in welfare. However, several empirical studies indicate that a doubledividend does not exist because of the high costs associated with collecting the public revenue
(see, e.g., Brendemoen and Vennemo, 1996). Therefore, we recommend using welfare instead of
socio-economic rent when attempting to identify the optimal regulation for fisheries.
2.7. Profit
Profit is defined as the difference between the total revenue and the total actual costs of
production factors. For fisheries, both homogeneous and heterogeneous production factors can
10
The concept is also labelled socio-economic yield or return in the literature.
11
be assumed (see Copes, 1972). With homogeneous effort, profits must be contrasted with
resource rent, while profits and resource rent plus producer surplus should be compared with
heterogeneous effort. Note that profits are defined using actual remuneration of effort and not
opportunity costs as is the case for resource rent. As mentioned in the introduction, market
failures will often arise on effort markets for fisheries. Therefore, the marginal opportunity cost
and marginal actual cost differ and with this, marginal profits and the marginal resource rent (or
marginal resource rent and marginal producer surplus) are not identical. In section 4, the
difference between actual cost and opportunity cost is investigated empirically.
2.8. Illustration of welfare concepts
In this section, we illustrate resource rent, consumer surplus, producer surplus and welfare by
using Figure 2 which is taken from Copes (1972).
Figure 2: Different concepts characterizing a social optimal resource allocation.
In Figure 2, Q is the output and P is the output price. A negatively sloped demand curve, D, has
been drawn and the consumer surplus is the area under this curve at a given price. An open-access
supply curve, AMC, has also been sketched and the backward-bending nature of this supply curve
is well-known (see Copes, 1972). Note that AMC measures the average cost for each unit of
output. A supply curve in a social optimum, MMC, is also included in Figure 2. Note that both
MMC and AMC are industry cost curves and that the difference between MMC and AMC at a given
Q is the marginal resource rent (see Figure 2B). AMC and MMC are constructed under the
assumption of homogeneous effort, while for heterogeneous effort, another supply curve, ASC,
may be introduced. The difference between AMC and ASC at a given Q is the marginal producer
surplus.
Now it is possible to evaluate various equilibrium concepts and we begin with open-access. An
open-access equilibrium exists where AMC intersects the demand curve which occurs at A in
Figure 2A. Under open-access, the output price is B and Figure 2A confirms that resource rent is
exhausted in open-access. However, under open-access, the total consumer surplus is ABC, while
the total producer surplus is equal to ABFH. Thus, in open-access, a positive welfare exists even
though resource rent is exhausted. Next, consider the social optimum which is illustrated in Figure
12
2B. This optimum arises where MMC intersects the demand curve, which occurs at G in Figure 2B
and now the market price is H. In the social optimum, the total consumer surplus is CHG, the total
producer surplus is KJLM and the total resource rent is HGJK. Total welfare is the sum of consumer
surplus, producer surplus and resource rent and this welfare shall be maximized. Homogenous
effort implies that no producer surplus arises and, therefore, ASC and AMC collapse into one line.
With homogeneous effort, the sum of resource rent and consumer surplus is maximized. Provided
the price is constant, no consumer surplus on infra-marginal output units arises and total welfare
is the sum of producer surplus and resource rent. With both homogenous effort and a constant
output price, we only maximize resource rent in an optimum. Resource rent maximization is often
used to find a welfare optimum in fisheries economics, but this neglects producer surplus and
consumer surplus. Thus, an implicit assumption behind resource rent maximization is
homogeneous fishermen and a constant output price.
3. Inconsistent use of concepts
In this section, an explicit or implicit definition of the welfare concepts in the fisheries economics
literature is investigated. It is shown that many papers are not aware of the distinction between
actual costs (profit) and opportunity costs (resource rent). In addition, several papers exclude
producer surplus, consumer surplus or resource rent when defining welfare. These conclusions are
reached by either quoting or discussing the definition of welfare concepts in selected papers.
The selection of papers to be investigated is a core issue. We mainly use classical papers by
fisheries economists, but we also include a recent example of an academic discussion. Concerning
the classical papers, we chose to use Anderson (2002a) and (2002b), which are two edited books
containing 46 of the most influential papers in fisheries economics. We treat both theoretical and
empirical papers, but require that a mathematical approach is used. Papers with a mathematical
approach are chosen because the definition of welfare concepts is clear with such an approach.
The result of the investigation of the classical papers is striking because many of the papers use
one or more optimality concepts in an inconsistent way. The recent example is an academic
discussion of extinction of a fisheries resource under open-access by Clark et al. (2010) and
Grafton et al. (2010) in Land Economics. This example is included in order to illustrate that the
inconsistent use of welfare concept also exists in modern economics.
13
3.1. Opportunity cost and actual costs
We begin by illustrating that many classical papers do not distinguish between opportunity costs
(resource rent) and actual costs (profit). To avoid any confusion, only papers that assume a
constant marginal cost of effort are included. With a constant marginal cost of effort, producer
surplus may be disregarded and, therefore, we can compare profit and resource rent directly. A
classical contribution to fisheries economics theory on the optimal extraction of a renewable
resource is Clark and Munro (1975). In Clark and Munro (1975), the exploitation of a fisheries
resource is given a capital theoretical interpretation and the famous golden rule for the
exploitation of a renewable resource is derived. The output price is assumed to be constant so
there is no consumer surplus, but with respect to the definition of costs of effort, Clark and Munro
(1975) state:
“There is, of course, the complication to be faced that the biological constraint (2.3)
is accompanied by a harvesting cost constraint. The harvesting cost function is
dependent upon an effort cost function.”
Thus, Clark and Munro (1975) use actual costs and, therefore, profit is included in the expression
for welfare. However, opportunity costs ought to be used and, therefore, resource rent instead of
profit should be included in welfare. Thus, Clark and Munro (1975) do not make a clear distinction
between resource rent and profit.
Clark et al. (1979), Anderson (1975), Munro (1979), Andersen and Sutinen (1984), Clark et al.
(1973) and Conrad (1992) use exactly the same incomplete definition of costs. Clark et al. (1979)
study irreversible investment by introducing non-malleable capital, but use operating harvesting
costs instead of opportunity costs. Anderson (1975) considers multi-species models and includes
both biological and technological interdependence. The analysis in Anderson (1975) is mainly
static, but when finding MEY, profit, not resource rent, is maximized. Munro (1979) analyzes a
transboundary fish stock using cooperative game theory and uses actual costs instead of
opportunity costs. Andersen and Sutinen (1984) present an overview of papers on stochastic bioeconomics and when discussing stock uncertainty, the unit cost of harvest is used. Clark et al.
(1973) construct a year-class model (Berverton-Holt model) and state that discounted profit
instead of resource rent is maximized. Conrad (1993) estimates a stochastic steady-state model in
14
order to find an optimal policy rule under adaptive management for the Pacific whiting fishery, but
use data on actual cost and not opportunity costs.
3.2. Resource rent and profit
The issue of resource rent and profit also arises in connection with open-access in the classical
literature. As in section 3.1., we only include literature that assumes constant marginal cost of
effort, which implies that producer surplus can be disregarded. The basic problem is illustrated in
Clark (1973) who studies over-exploitation in an open-access equilibrium. In connection with the
analysis it is stated that:
“rent appears to be the same thing as profits.”
Thus, Clark (1973) explicitly states that profit and resource rent are identical under open-access.
However, under open-access, resource rents are exhausted and opportunity costs instead of
actual cost under open-access govern the behavior of fishermen. Thus, Clark (1973) does not draw
a clear distinction between profit and resource rent.
A similar problem arises in Gould (1972), Boyce (1996), Bjørndal and Conrad (1987) and Anderson
(1982). Gould (1972) studies the extinction of a fishery resource and claims that under openaccess, a zero profit condition exists. Boyce (1996) investigates by-catches within a bio-economic
model where open-access is characterized by profit exhaustion. Bjørndal and Conrad (1987)
estimate dynamic adjustment paths for the North Sea herring fishery under open-access, but
vessel dynamics is a function of profit instead of resource rent. Finally, Anderson (1982) considers
sharing rules for the remuneration of crew, but open-access is described by the exhaustion of
profit.
3.3. Producer surplus
With increasing marginal cost of effort, welfare includes both resource rent and producer surplus.
However, we now show that several classical papers do not explicitly include producer surplus
given this assumption. For example, Clark (1980) discusses the welfare consequences of various
regulatory instruments. Regarding the costs of effort, Clark (1980) assumes:
15
“Each vessel is price taker and has u-shaped marginal cost curves for the supply of
fishing effort.”
Assuming u-shaped marginal cost curves implies that fishermen are heterogeneous and, therefore,
a producer surplus on effort arises. However, Clark (1980) states that only resource rent is
included in welfare, but this is clearly an inconsistent definition of a welfare function.
The same inconsistent characterization of welfare arises in Arnason (1990), Boyce (1992),
Hannesson and Steinsham (1991) and Anderson and Lee (1986). Arnason (1990) shows that a
variant of ITQs minimizes the information requirements and assumes increasing marginal costs of
effort. With this assumption, fishermen are heterogeneous and a producer surplus exists, but
Arnason (1990) does not explicitly include producer surplus in welfare. Boyce (1992) shows that
ITQs do not totally solve stock externality problems and congestion externality problems. When
reaching this conclusion, Boyce (1992) assumes increasing marginal cost of effort, but only
resource rent is maximized. Hannesson and Steinshamn (1991) study the difference between a
constant harvest rule or a constant effort rule when the fish stock is a stochastic variable. The
marginal cost function is increasing in effort, but only profits are maximized. Anderson and Lee
(1986) investigate enforcement under effort regulation and an increasing marginal cost function in
effort is assumed. Therefore, a producer surplus arises, but this surplus is not explicitly included in
the welfare measurement.
3.4. Consumer surplus
An assumption in many classical papers is a constant output price which means that no consumer
surplus arises. However, a few papers assume a negatively sloped demand function and despite
this assumption, some of the papers do not include a consumer surplus in welfare. One example of
such an inconsistent definition of welfare is Hannesson and Steinshamn (1991). As mentioned in
section 3.3., Hannesson and Steinshamn (1991) study whether a constant effort rule or a constant
catch rule should be used under uncertainty. With respect to revenue, the following assumption is
made:
“A concave revenue function”
16
A concave revenue function implies that the demand function is negatively sloped. However,
despite this fact, Hannesson and Steinshamn (1991) do not include consumer surplus in welfare.
Another example of non-constant prices is Kellogg et al. (1988) who conduct an empirical
investigation of optimal harvest in the North Sea Carolina Bay Scallop Fishery. A slope parameter
in a demand function is estimated and this parameter is significant. Therefore, consumer surplus
ought to be included in welfare, but Kellogg et al. (1988) fail to do so.
3.5. Resource rent
The last issue is concerned with excluding resource rent from welfare and in almost all classical
papers, resource rent or profit is included in welfare. However, one exception is Sutinen and
Andersen (1982) who study compliance and enforcement of quantity regulation. The demand
function is negatively sloped, so a consumer surplus arises and marginal costs increase in effort
implying that a producer surplus exists. When defining welfare, Sutinen and Andersen (1982)
state:
“optimal policies are based on the usual criterion of maximizing the discounted sum
of net social benefit. “
According to Sutinen and Andersen (1982), net social benefit is the sum of consumer surplus and
producer surplus minus the enforcement costs. However, resource rent is not part of producer
surplus (see Figure 1) and, therefore, Sutinen and Andersen (1982) does not explicitly include
resource rent in welfare.
The overall conclusion from this section is that almost all classical papers use welfare concepts in
an inconsistent way. In particular, fisheries economists often exclude either consumer surplus,
producer surplus or resource rent from welfare and, in addition, do not distinguish between actual
cost (profit) and opportunity cost (resource rent) However, the inconsistent use of optimality
concept does not only exist in classical fisheries economic papers . In recent papers, welfare is also
defined in an inconsistent way and this is illustrated now.
3.6. An example from recent literature
17
Here we include an academic discussion about extinction of fish stocks under open-access by Clark
et al. (2010) and Grafton et al. (2010) in Land Economics. Clark et al. (2010) assume a constant
output price and constant marginal cost of effort so consumer surplus and producer surplus do
not exist. Regarding open-access, Clark et al. (2010) claim that:
“economic profits may cause stock depletion or extinction”
A similar claim can be found later in the paper:
“extinction is more profitable than any sustained yield strategy”
Thus, Clark et al. (2010) state that profit, and not resource rent, is exhausted under open-access.
However, under open-access, fisherman reacts to opportunity costs and not actual costs. This
implies that Clark et al. (2010) use profit and resource rent in an inconsistent way.
Note that Grafton et al. (2010) have criticized the conclusions by Clark et al. (2010), but Grafton et
al. (2010) do not mention the distinction between profit and resource rent. Instead, Grafton et al.
(2010) state:
“profit maximization for the four fisheries they studied promotes both larger fish
stocks and higher profits”
Therefore, Grafton et al. (2010) also use profit instead of resource rent to characterize an openaccess equilibrium. Thus, the superficial use of welfare concepts in classical paper also exists in
recent fisheries economics papers.
4. Magnitude of various optimality concepts
However, the inconsistent definition of a welfare function is only important if the various
components of welfare (producer surplus, consumer surplus and resource rent) have a significant
size. In addition, including profit instead of resource rent in welfare is only important when
opportunity cost and actual cost differ. These two issues are empirical questions which we
investigate in this section. Regarding the difference between opportunity cost and actual cost, this
issue is based on own simple calculations. In contrast, the investigation of the size of producer
18
surplus, consumer surplus and resource rent is conducted by providing an overview of the existing
empirical literature.
.
4.1. Opportunity cost and actual cost
Now we investigate the difference between opportunity cost and actual costs by adopting an
assumption about either homogeneous or heterogeneous vessels. Thus, we discuss whether
resource rent (homogeneous fishermen) or resource rent and producer surplus (heterogeneous
fishermen) differs from profit. We begin by justifying four assumptions that are imposed when
calculating opportunity costs and actual costs within fisheries. First, we use labor and capital as
production factors11 despite the fact that fishing effort is often applied in fisheries economics.
Labor and capital are selected because remuneration statistics normally distinguishes between
these two production factors. Second, the actual cost and opportunity costs for only one country
are presented (Denmark). By focusing on cost information for one country, we are able to
compare costs between various vessel groups. Third, opportunity costs for labor and capital must
be found. The wage for uneducated, industrial Danish workers is used to measure the cost of
labor, and this is approximately €53,800/year in 2011 (see Anon, 2011a). The opportunity cost of
capital is measured by the average interest rate for government bonds in 2011 at 5% (see Anon,
2011b). The two choices of opportunity costs for labor and capital are consistent with the tradition
within fisheries economics (see, e.g., Waldo et al., 2014). Last, we must find the actual
remuneration of labor and capital within fisheries. For labor, the actual annual remuneration for
crew is used and the actual cost of capital is directly available from Anon (2011c). We chose a
yearly measure for the remuneration of labor in order to minimize the effect of seasonable
variations in wages within fisheries.
The actual remuneration of labor and capital within fisheries in Denmark decomposed to different
vessel categories is presented in Table 1.
Table 1: Actual remuneration of labor and capital in Danish fisheries in 2011.
11
Production factors other than labor and capital are also used in fisheries including gasoline and gear, but these
factors are excluded in this paper.
19
From Table 1, we see that the actual remuneration of labor and capital varies considerably
depending on vessel size. For labor, the actual remuneration is lower than the opportunity costs
(€53,800 /year) for small vessels (under 12 meters, 12-15 meters and 15-18 meters), while the
opposite conclusion holds for large vessels (18-24 meters, 24-40 meters and over 40 meters). The
opportunity costs of capital (5%) are only smaller than actual remuneration for very large vessels
(over 40 meters). Thus, the actual costs of labor and capital differ from the opportunity costs of
these production factors for all vessel groups and, therefore, profit differs from resource rent (or
resource rent and producer surplus) for the Danish fishery. Three points are worth mentioning in
connection with the figures in Table 1. First, the actual costs of labor and capital also vary
depending on, for example, the geographical location of the fishing activity. However, for a
discussion of the definition of welfare, variation due to geographical location is of minor
importance. Second, in Denmark crew is often remunerated according to a share of the revenue or
profit rule. These rules imply that crew gets a minimum wage and a bonus in the form of a share of
the profit or revenue. However, the shares often vary between vessels. Irrespective of this, the
remuneration of labor is high in good fishing years and low in poor fishing years. Thus, the choice
of year for measuring the actual cost of labor will influence the results. Last, small vessels often do
not fish for the entire year, which implies that the remuneration of labor for small vessels is
underestimated by focusing on wages per year.
4.2. Producer surplus12
For producer surplus, this measure must be of reasonable size to affect total welfare. As discussed
in section 2, we can focus on whether the production factors are homogeneous or heterogeneous
in fisheries. Heterogeneous production factors may be caused by many things including age,
education, skill, and technical efficiency. However, we investigate the existing empirical literature
on technical efficiency to discuss the size of the producer surplus in a given fishery. Technical
efficiency can be defined as the maximum possible output that can be produced with a given
combination of production factors. With this, an efficiency score is calculated by comparing the
actual use of production factors with a production possibility frontier. Based on the efficiency
score, we measure the heterogeneity of vessels in two ways. First, we use the mean technical
12
In this section we assume that actual costs and opportunity costs are identical for fisheries.
20
efficiency score for a number of vessels in a given fishery. Second, the variance of the technical
efficiency score is investigated. A high mean technical efficiency score may indicate homogeneity,
while a low mean technical efficiency score imply heterogeneous vessels. In addition, a high
variance of the efficiency score indicates heterogeneity, while a low variance implies
homogeneity. Data envelope analysis (DEA) and stochastic production frontier (SPF) are two
possible methods for estimating technical efficiency. We include empirical studies using both
approaches because we want to demonstrate that the results regarding the size of the producer
surplus are robust to the choice of method.
DEA is a non-parametric approach where the production frontier is defined as an envelope curve.
A number of issues arise for DEA including input or output-based measures, a single-product case
or multi-product case, choice of output variables and input variables, the inclusion of fixed costs
and assumptions about returns to scale13. We selected the following literature estimating
technical efficiency with DEA: Hutton et al. (2003), Jensen et al. (2003), Gousios et al. (2003),
Ceyhan and Gene (2014), Dupont et al. (2002), Kirkley et al. (2003), Thøgersen and Pascoe (2013),
Herrero et al. (2006), Tingley and Pascoe (2006) and Lindebo et al. (2007). The mean technical
efficiency scores in these studies vary between 0.19 and 0.94 while the variance on the scores lies
between 0.19 and 0.33. Comparing the studies shows that a high variance implies a low mean
technical efficiency score. To judge whether vessels are homogeneous or heterogeneous, we refer
to Coelli et al. (2005) who state that a mean efficiency score is low when it is below 0.75, while a
variance is low when it is below 0.15. With these criteria, the mean scores are low and the
variance is high in the majority of the investigated papers. This indicates that the vessels in the
considered literature are heterogeneous, and, therefore, a significant producer surplus exists. The
included studies vary with respect to the fishery, the models, output variables, input variables,
input or output orientation, single or multi-product assumption and the assumptions about return
to scale. Therefore, the conclusion about heterogeneous vessels seems robust to changes in
model assumptions.
We also include SPF analysis of technical efficiency in fisheries to investigate the robustness of the
results about the size of the producer surplus. SPF is a parametric approach and statistical
13
See Coelli et al. (2005) for an overview of issues in DEA.
21
methods are used to estimate the production possibility frontier but SPF can normally only handle
one output. Important issues in SPF are output variables, input variables and the functional form
of the production possibility frontier.14 Regarding the empirical literature which applies the SPF to
estimate technical efficiency, we include Kirkley et al. (1995), Esmalli (2006), Grafton et al. (2000),
Viswanathan et al. (2001), Susilwati et al. (2005), Vestergaard et al. (2003), Innes and Pascoe
(2008), Pascoe et al. (2003) and Pascoe and Coglan (2002). The mean technical efficiency scores in
the included studies vary between 0.26 and 0.85 while the variance lies between 0.18 and 0.32.
Note that compared to DEA, the mean efficiency scores are higher and the variances are lower.
Following the criteria in Coelli et al. (2005), the mean scores are low and the variance is high in the
majority of the included studies. This indicates that vessels are heterogeneous. In addition, the
studies included vary with respect to input variables, output variables and the functional form of
the production possibility frontier. Therefore, the conclusion about heterogeneous vessels is
robust to variations in the model assumptions. Exactly the same conclusion is reached with the
DEA method so it can be concluded that producer surplus is a significant size in fisheries.
4.3. Consumer surplus15
Consumer surplus must also be a reasonable size to matter for welfare in fisheries and for this
surplus, we focus on the slope of a demand function. Therefore, we provide an overview of part of
the existing empirical literature which estimates demand functions for fish products now. In the
theoretical literature, two different demand functions are identified; Marshallian demand
functions16 and Hicksian demand functions.17 Consequently, a Marshallian consumer surplus and a
Hicksian consumer surplus can be defined. 18In the empirical literature which estimates demand
functions for fish products, a distinction can be drawn between inverse demand functions and
ordinary demand functions. With inverse demand functions, prices are expressed as a function of
14
See Coelli et al. (2005) for a discussion of these issues in SPF.
As in section 4.2 it is assumed that opportunity csost is equal to actual costs.
16
In reaching this demand function utility is maximized subject to a budget constraint. By solving the first-order
conditions of this constrained maximization problem, demand as a function of price and income is reached and these
functions are labelled Marshallian demand functions.
17
The Hicksian demand function is derived by minimizing expenditures on goods subject to a given utility. From this
maximization problem, demand as a function of prices and utility can be derived.
18
The Hickesian consumer surplus is normally regarded as being theoretically correct because utility, and not income,
15
is constant along the Hicksian demand function.
22
quantities (quantities determine prices) and quantities are exogenous. In an ordinary demand
function, the quantity is a function of prices (prices determine quantities), with the price being
exogenous. From a theoretical point of view, the choice between inverse demand functions and
ordinary demand functions should not influence empirical results because a relationship between
the two demand functions exists. However, many empirical studies show that the theoretical
relationship between the two demand systems do not hold (see Houck (1966) and Huang (1994))
so we must choose between inverse demand systems or ordinary demand systems in this paper.
We decide to present empirical studies using ordinary demand functions, which are justified by
large market integration between various fish products. 19 For ordinary demand functions, an own
price elasticity can be calculated20 and empirical fish product studies using these demand
functions focus on the size and significance (t-value) of this elasticity. However, to investigate the
size of the consumer surplus, the slope and the t-value of this slope must be identified, but it is
possible to reach an approximation for the slope parameter and the t-value from the elasticity
using the following approach. It is well-known that for many demand functions, the value of the
elasticity varies along the function and in all the empirical studies included here, the elasticity is
calculated by using an actual price and output combination on the market at a given time. At the
actual price and output combination, the demand function may now be approximated with a
linear function,21 and by using the size of the elasticity and the actual price and output, the slope
parameter can be calculated. In addition, the t-value of the slope parameter can be calculated
using a similar procedure which then allows us to investigate the size of the consumer surplus.
A number of issues arise when estimating ordinary demand functions including defining the
market, the selection of explanatory variables, the choice of functional form and the selection of a
measure for consumer surplus.22 The following empirical studies which estimate ordinary demand
functions for fish products are included: Burton (1992), Asche et al. (1998), Wessels and Wilen
(1994), Eales and Wessels (1999), Kinnucan and Miao (1999), Bjørndal and Salvanes (1991), Pham
19
However, the choice between ordinary and inverse demand systems for fish products is not straightforward. For
example, widespread use of quantity regulation within fisheries implies that inverse demand systems ought to be
chosen.
20
This elasticity is defined as the percentage increase in the quantity of a good with an increase in price by one
percent. If the price elasticity is less than – 1, the good is elastic, while the good is inelastic if the elasticity is greater
than – 1.
21
In mathematical terms, a first-order Taylor approximation around the actual market observation is conducted.
22
See Deaton and Muellbauer (1980) for a discussion of these issues.
23
et al. (2008) and Salvanes and Devoretz (1999). In these studies, the size of the elasticity varies
between – 0.44 and – 2.86 which indicates that fish products can be both elastic and inelastic
goods but in all the included empirical studies, the elasticity is significant. The slope of the demand
function and the t-value for this slope can be found by using the procedure described above, and
in all the included studies, the slope parameter is significantly negative. With a significantly
negative slope for a demand function for fish products, it can be concluded that consumer surplus
is important for total welfare. Note that the empirical studies differ with respect to market
definition, explanatory variables, the functional form of the demand system and the consumer
surplus measure. Therefore, the conclusion about a significantly negatively sloped demand
function is robust to variations in the basic model assumptions.
4.4. Resource rent
The last component of welfare which we investigate empirically is the resource rent. Resource
rent in a given fishery depends on many factors and one of these is the regulatory regimes.
Following Homans and Wilen (1997), fishery regulation often moves through the following four
stages over time: open-access, regulated open-access, regulated restricted access and ITQs. When
moving between stages, the resource rent in a given fishery increases and, therefore, regulatory
regimes for measuring the resource rent empirically must be chosen. We chose to measure the
resource rent by comparing open-access to ITQs. Because the resource rent is exhausted under
open-access, the total resource rent under ITQs is the measure we want to find. When selecting
empirical studies on the size of resource rent five assumptions is imposed. First, the total quota in
the included studies is defined by using both biological and economic criteria. Biological criteria for
determining the total quota are included because these are used in many actual fisheries managed
with ITQs. Second, the size of the resource rent is determined by measuring the rent in proportion
to the total revenue. This is selected because total revenue is a measure of the size of a fishery.
Third, resource rent estimates are only presented for countries because country specific measures
are more reliable than measures for regulatory systems involving several countries. Fourth, we
include studies both with and without producer surplus as a part of the resource rent (both
constant and increasing marginal cost of effort). In empirical studies, it is often difficult to separate
resource rent and producer surplus due to data problems. Finally, resource rent is only presented
24
for one year and not as the discounted sum of present and future resource rents. This is chosen to
avoid the common problem of selecting the correct discount rate.
With respect to empirical studies, we include Grainger and Costello (2012), Kristoffersen (2010),
Steinsson (2010), Newton et al. (2007), Andersen et al. (2010) and Hoff (2013). In these studies,
the resource rent varies between 16 % and 61 % of the total revenue. These figures illustrate that
the resource rent is significant in all the included papers and, therefore, this rent is an important
component of welfare. The included studies differ with respect to the rationale for selecting the
total quota and the treatment of producer surplus. Thus, the result of a significant resource rent is
robust to changes in these measurement issues. The included studies also vary with respect to the
practical design of the ITQ systems which differ with regards to scope, time required for
implementation, time required to measure the resource rent, limitation on trading rule, use of
cost recovery rule, use of taxation system and enforcement system. The actual size of the resource
rent in any given fishery will, of course, reflect design issues. However, irrespective of the actual
design of the ITQ systems, the resource rent forms a significant part of welfare. Finally, it should
be noted that the resource rent obtained from moving from open-access to ITQs consist of two
efficiency gains. First, fishing activities become more efficient and this can also be labelled more
efficient use of production factors and increased productivity. Second, a more efficient industry
structure is obtained and, hence, existing overcapacity is reduced.
The overall conclusion of this section is that producer surplus, consumer surplus and resource rent
all have a significant size and that actual costs (profit) and opportunity costs (resource rent) differ.
To understand the implications of an inconsistent definition of welfare, assume that in finding MEY
we only maximize profits but instead of profits, resource rent ought to be used. In addition, if
fishermen are heterogeneous and the demand function is negatively sloped, a producer surplus
and consumer surplus will arise. Thus, instead of only using profits to find MEY, MEY should be
found by maximizing the sum of the resource rent, producer surplus and consumer surplus. Using
the last definition of welfare implies that MEY increases and, therefore, the way in which welfare
is defined is very important when it comes to practical policy making.
5. Discussion
25
Eight issues are worth discussing in relation to the present paper. First, it is often argued that the
resource rent should be taxed in an ITQ system to ensure a fair distribution of resource rents.
However, the main argument is that resource rent, and not consumer and producer surplus should
be taxed because consumer surplus and producer surplus do not arise for the owner of the
resource. Now it is important to distinguish between resource rent, consumer surplus and
producer surplus.
Second, in fisheries, a value chain of consumers and producers exists which includes a harvesting
sector, a sector of secondary firms and the final consumers. Following the basic structure in
fisheries economics textbooks (see, e.g., Neher, 1990), welfare includes resource rent and
producer surplus in the harvesting sector and consumer surplus for the final consumers. However,
producer surplus and consumer surplus also arise in the secondary sector and surpluses in this
sector should be included in a welfare function.
Third, in an ITQ system, the total annual quota can be determined by using biological or economic
criteria. When using economic criteria, the definition of welfare is important because it will
influence the total annual quota.
Fourth, welfare has been defined by using a equilibrium approach, but in reality fisheries are never
in a steady-state equilibrium. This implies that, in theory, welfare should be defined by using a
disequilibrium approach, but such an approach complicates the definition of welfare. In addition,
welfare is defined using the same concepts irrespective of whether an equilibrium or
disequilibrium approach is applied. Thus, defining welfare using an equilibrium approach is well
justified.
Fifth, classical economic theory has introduced a number of other rent concepts than those
included here (pure economic rent, quasi-rent, differential rent, Ricardian rent and productivity
rent). These classical rent concepts can, of course, be applied in a fisheries context, although to do
so is not the objective of this paper. We want to investigate the components of welfare as
normally defined in modern micro/welfare economics.
Sixth, from a marginal perspective (marginal welfare equal to zero), a discussion about the correct
definition of welfare is less important because, for example, marginal producer surplus plays a
26
minor role for marginal welfare. However, here we adopt a total perspective and maximize total
welfare. For total welfare, total producer surplus is important as demonstrated in section 4.
Seventh, when finding the empirical size of producer surplus and consumer surplus we use actual
costs even though these surpluses is defined using an opportunity cost concept in section 2.
However, this choice is well justified because a common approach in economics is to investigate
the effect of one factor holding all other factors constant and, in addition, the welfare function is
the sum of resource rent, producer surplus and consumer surplus. Both of these points imply that
we can find the size of both producer surplus and consumer surplus assuming that actual costs
and opportunity cost are identical.
Last, fisheries economists often argue that the regulation of fisheries is necessary because of
open-access. Under open-access resource rents is exhausted which means that society must
regulate to improve welfare. However, this argument does not take consumer surplus or producer
surplus under open-access into account and including these surpluses reduces the welfare gained
from regulation. However, even with a positive welfare under open-access, it is likely that
regulation is still beneficial for society. Compared to open-access, both producer surplus and
resource rent increase with MEY, but consumer surplus decreases due to a negatively sloped
demand function. However, it is likely that the total net gain with MEY will be significant which
means that regulation is still important from an economics perspective.
6. Conclusion
In this paper, we have defined various concepts for measuring welfare in fisheries. The concepts
defined are resource rent, consumer surplus, producer surplus, infra-marginal rents, welfare,
socio-economic rent and profit. By examining several seminal papers and a recent academic
discussion, we show that many fisheries economists use these concepts inconsistently. In many
papers, producer surplus, consumer surplus or resource rent is excluded when defining welfare. In
addition, many papers do not distinguish between opportunity costs (resource rent) and actual
costs (profit). We have also shown that producer surplus, consumer surplus and resource rent are
significant for fisheries by examining existing empirical papers and, thus, these rents influence
total welfare. In addition, the distinction between resource rent and profit has been shown to be
important using account statistics. These conclusions have implications when measuring, for
27
example, MEY and due to the inconsistent definition of welfare, fisheries economists have not
identified all the benefits and costs of regulation.
Now let use provide a brief overview of how welfare should be defined in fisheries. We adopt the
common assumption that no consumer surplus on factor markets and no producer surplus on
output markets arises. First assume that effort is totally homogeneous (the factor supply curve is a
horizontal line) and that the output price is constant (the demand function is a horizontal line). In
this case, welfare is equal to the resource rent and this definition of welfare is commonly used in
the fisheries economics literature. Next assume that effort is heterogeneous which means that a
producer surplus on effort also arises and now welfare is the sum of the resource rent and
producer surplus. Last, assume both a negatively sloped demand function and heterogeneous
effort. Now a consumer surplus on output markets also arises and welfare is the sum of the
resource rent, producer surplus and consumer surplus. Excluding one of these three welfare
components implies underestimation of total welfare in a given fishery.
One major limitation of this paper is that we have defined the welfare function as the sum of
producer surplus, consumer surplus and resource rent. This implies that welfare only arises in
association with harvesting and consuming fish. However, several other social benefits arise in
connection with fish including biodiversity and eco-system benefits. These benefits should also be
included in welfare and estimating, for example, MEY when including these additional benefits is a
topic for future research.
28
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Figure 1: Resource rent and producer surplus.
36
Figure 2: Different concepts characterizing a social optimal resource allocation
Figure 2.A: Open access
Figure 2.B: Optimal management
Source: Copes (1972).
37
Table 1: Actual remuneration of labor and capital in Danish fisheries in 2011
Vessels
under 12
meters
Vessels
between
12-15
meters
32,000
Vessels
between
15-18
meters
51,500
Vessels
between
18-24
meters
69,500
Vessels
between
24-40
meters
77,700
Vessel over
40 meters
Wage per
10,800
201,700
year (€)
Remuneration -4.9
-0.4
1.6
3.6
3
13.8
1
of capital (%)
Note: The figures in Table 1 cover what is left for the remuneration of production factors before
tax (the gross revenue). The wage is calculated by subtracting the cost of capital from the gross
revenue. The cost of capital is set at 5% and the remuneration of capital is reached by subtracting
the costs of the crew and skipper from the gross revenue. Both the crew and the skipper are
assumed to receive the same wage as uneducated, industrial workers, while the workers are
assumed to work 7.4 hours per day.
Source: Anon (2011b)
38