2. Commentary Article

Overfishing Threatens Key Species in Mexico,

Greenpeace Says

 

16.02.2010

From Latin American Herald Tribune

 

MEXICO CITY – The species of fish and shellfish most consumed in Mexico "are at risk" due to overfishing, according to Greenpeace, which presented Tuesday a list of the ones that are most endangered.

Red snapper, shrimp, sardines, sharks, rays, tuna and groupers from the Gulf of Mexico, salmon from the Atlantic and grey mullet are all on the Red List prepared by the environmental organization.

"We Mexicans want to continue eating fish and shellfish, and we should not wait for their populations to be exhausted," Alejandro Olivera, coordinator of the oceans-and-coasts campaign for Greenpeace Mexico, said in a communique.

He blamed the National Fisheries Commission, or Conapesca, for the overfishing, since the current fishing policy has put "many" populations at risk and has impoverished the fishing sector by having more and more people working in it while undersea resources are disappearing.

Olivera demanded that Conapesca put order in the industry and said that his organization is not against fishing, "but we have to give the oceans a little breathing space."

Greenpeace proposes banning "predatory" fishing methods, such as trawling, "which clears out the sea bottom," and drift netting, "which catches turtles and marine mammals and other endangered species."

Other recommendations include avoiding the capture of young specimens that have not reproduced, "as happens in the case of sharks," according to Olivera.

"The big distributors and the fishing industry can and should also employ sustainable purchasing policies and stop buying species that are included in this document," he said. EFE

 

http://laht.com/article.asp?ArticleId=352435&CategoryId=14091

Commentary 2

Silvia Dieter

IB Economics

04.03.2010

Commentary 2

Overfishing Threatens Key Species in Mexico,

Greenpeace Says

March 4^th 2010

From Latin American Herald Tribune

Syllabus: Market failure, negative externalities of production, permits, MPC, MSC, MSB, government tax

Words: 737

Fish and shellfish are most consumed in Mexico. This is due to the overfishing. More and more people are working in the fish industry for the reason that the production through "predatory" methods, such as trawling and drift netting, is fairly cheap and the demand is high. However, through these fishing methods, the fish population is disappearing. Also, the high demand for fish encourages the fishers to continue the mass-production. The article says that 'Current fishing policies has put "many" populations at risk'. Yet, the government has not taken actions in order to reduce the overfishing.

A market failure exists when there is an over/under allocation of resources to a certain good. Overfishing is a market failure because it is an overproduction of fish. This means that the production of fish is faster than the replication of the fish population. Fish is a scarce resource since it is a highly desired but limited and unregulated good. At the same time it is a negative externality of production. This means that production of fish has a negative effect on a third party. In this case there will be negative ecological consequences since the animals that eat these fish won't have anything to eat because of the exhaustion of the population. The diagram on the right side shows the negative externalities of the fish production. MSB is the marginal social benefit; the amount of output demanded by the society at different prices. Fish is a merit good, which means that they are underprovided and beneficial to society. Eating fish is healthier than for example fast food. MSC stands for marginal social cost; the cost the production externalizes and consequently the society has to face. MPC represents the marginal private cost; the producer externalizes some of its cost. Qe/Pe represents the quantity and price being in equilibrium. Qso/Pso stands for the social optimum level. Regarding the diagram, there is a misallocation of fish resources; too much fish is being produced at a too low price. Therefore there is a dead weight loss (yellow shaded area); the cost the society has to face by the inefficiency in the fish industry.

In order to prevent overfishing and reduce its quantity demanded the markets prices have to rise. Due to the tragedy of commons this shows the phenomena of arrival good being unregulated. Releasing negative advertisement about fishing methods (i.e. drift netting) and the negative consequences on the environment might be a solution for decreasing the demand for fish: the society stops buying fish which were being caught through these methods. Also, opening people's eyes by explaining the long term consequences, for example that the fish will become extinct, might help decreasing the demand.

To facilitate the decrease in supply and correct the marker failure, the government could set taxes on the fish industry. However, it is difficult to determine the right amount of tax.

As shown on the diagram, due to the tax, the price for the product will rise. As result there is a lower quantity demanded. When taxing the fish industry, the government receives a tax revenue (consumer burden + producer burden).

Another way of decreasing the overfishing is by setting permits. Establishing permits means that each producer has a certain fishinglimit. Hence the fish population is able to survive before it's exhausted. Therefore the overfishing is automatically limited. Furthermore, when the demand rises (Dfp (fish population) shifts to the right D1), fishing is more expensive for the fishermen (from P1 to P2). This is an incentive for fishers to regulate the fishing. Another option for them is to sell their permits in order to gain profit without fishing. This would probably be the most efficient market-based solution against overfishing.

In the article it says "We Mexicans want to continue eating fish and shellfish, and we should not wait for their population to be exhausted". In my opinion, the society should take over responsibility to their actions. If they want to continue eating fish then they have to fight against the overfishing and the disappearance of their environment. If transparent functioning permits system would deffenatly be a step in the right direction. I think that overfishing is a very important matter which on one hand has many negative consequences and on the other hand needs to be fought for our utility.

Oligopoly

Explain why prices tend to be quite stable in a non-collusive oligopoly.

Oligopoly is where a few firms dominate an industry. Some oligopolistic firms produce almost the same product, for example petrol. Some firms produce highly differentiated products such as motor cars. Others produce less differentiated products, such as Shampoo. A non-collusive oligopoly is when firms in an oligopoly industry don't cooperate with other firms in the industry and therefore have to be very aware of the reactions of other firms when making pricing decisions. So when a firm lowers the price of their product, they have to increase their output which means higher costs for the production of their product. Consequently, their total revenue will fall because the demand for the product is more inelastic than before. Hence their total cost will increase. When their total costs increase their profits will decrease. As a result non-collusive oligopolistic firms tend to have relatively stable prices since raising prices by decreasing output and decreasing prices while increasing output can both harm an oligopolistic firm. Therefore non-collusive oligopolistic firms incline to produce between the point a and b on the diagram below. Nomatter where the marginal cost curve intercects the marginal revenue curve inbetween a and b the price will stay the same and therefore it remains stable.

Monopolistic Competition

Explain whether or not a firm in monopolistic competition earning abnormal profits is productively and allocatively efficient.

A monopolistic competitive industry is made up of a fairly large number of firms. In relation to the size of the Industry, monopolistic competitive firms are small. They produce slightly differentiated products, for example by brand name, color, design and quality of service. A firm in monopolistic competition has a downward sloping demand curve, since they are (extended) price-makers, which means that they are influential enough to affect the price of their product. The demand curve is relatively elastic because of the many substitutes (which are slightly different). A monopolistic competitive firm is able to gain abnormal profits in the short run. In this case the firm is maximizing profits by producing at the level of output where MC=MR. On the diagram below, q1 represents the productively efficient level. Productive efficiency is achieved when the marginal cost is at the lowest average total Cost. This means a productively efficient firm utilizes all its resourses and produces at the lowest cost possible. A monopolistic competitive firm is allocatively efficient when the marginal cost curve intersect the average revenue curve. This is because the price consumers are willing to pay equals the to the marginal utility they recieve. So a firm is allocatively efficient when there is an optimal distribution of the product. It's also called the socially optimum level of output. In this case, when a firm in monopolistic competition is earning abnormal profits, it is neither productively efficient, nor allocatively efficient. This is because the firm produces where marginal costs is equal to the marginal revenue, as opposed to the points of productive and allocative efficiency which are located differently.

Short response question > Monopoly

1. Explain the level of output at which a monopoly firm will produce

There are main theories of Monopoly: A firm is a monopolist when it's the only firm producing the product and is therefore the industry. For a monopolist, there exist barriers to entry, which stop new firms from entering the industry and maintain the monopoly. As a consequence of barriers to entry the monopolist may be able to make abnormal profits in the long run. However, it is important to know how much monopoly power a firm has. The strength will really depend upon how many competing substitutes are available.

The demand curve of a monopolistic firm is downward sloping, since it is the industry demand curve. Even though a monopoly firm can control their output and their price of the product, it can't control both at the same time. This means that for a monopoly firm the law of demand still is important. The law of demand says that as the price of a product falls, the quantity demanded of the product will increase; ceteris paribus. So in order to sell more of their product they have to lower their price. This affects the output. When a firm sets a high price for their product, the demand is less and therefore the output is less. However when the monopoly firm lowers their price to p1, the quantity demanded for their product increases to q1. Therefore the output increases as well. Hence a monopolist can't charge whatever price they like and still sell their product. Nevertheless a monopoly firm's goal is to maximize their profits and they maximize their profit by producing at the level of output where the marginal cost is equal to marginal revenue.

2. Using a diagram, explain the concept of a natural monopoly

A firm is a natural monopoly when there are only enough economies of scale available in the market to support one firm's abnormal profits. Economies of scale are any decreases in long-run average cost when a firm alters all of its factors of production in order to increase its scale of output.

The monopoly firm has the demand curve of D1. Because of the economies of scale the LRAC is shaped and positioned as it is. Therefore the monopolist can make abnormal profits between q1 and q2. This is because the average revenue is greater than the average cost for the range of output. However, when another firm enters the industry the demand from the monopolist would decrease and the curve D1 would shift to the left, D2. When the firms produce at the demand curve D2, they will have huge losses and won't be able to make normal profits because the LRAC would be above the AR and every level of output. However a monopolist will only gain abnormal profit when it is able to assure all of the demand of its product. So an industry is monopoly because the market will only support one firm.

3. Using appropriate diagrams, explain whether a monopoly is likely to be more efficient or less efficient than a firm in perfect competition.

Monopoly is more likely to be less efficient than a firm in perfect competition. The power of the monopoly plays a big role, since monopolists can use an anti-competitive behavior to keep their monopoly power. Competitive behavior is when they use their image, sales, advertisement or special offers to keep the customers attracted.

A monopoly firm produces productively and allocatively inefficient, as shown in the diagram on the left. A monopolist would probably produce at q1. However the most efficient point to produce as a monopolist is at q where MR=MC. Therefore the monopoly may restrict output and charge a higher price than in perfect competition. So the high profits of monopolists are considered unfair. However, the dimension of the profits depends on the power of the monopoly. So overall, a monopolist can charge a higher price for a lower level of output. Since some monopolists can act against public interest. Hence, the government has laws and policies to limit monopoly power.
Compared to the monopoly, the perfect competitive market produces most allocative and proactively efficient where MC=AR. Therefore all the profit-maximizing firms in the perfect competition produce efficient at the point q on the right diagram.

Monopoly

I live in Gockhausen, which is a very small village surrounded by forest. In this village there is only one hair dresser. For people who don't have a car, who are not able to go to town or who don't want to go to town only for getting a haircut, this is the only opportunity to go to a hair dresser. Especially for older people; this is an advantage. This firm has characteristics of a monopoly firm, such as producing a unique product in Gockhausen, since it is the only hairdresser in vicinity. This means that they are single sellers of the product in Gockhausen. Furthermore they are price makers. The danger, the hairdresser in Gockhausen faces is that more people might go to town to a hairdresser than go in Gockhausen, so that there is not enough demand for their product. However, monopolies are non-price competitors, meaning they don't attract customers by lowering the price; they attract them by having sales or packages or flat rates, as well as advertisement. Therefore the hairdresser in Gockhausen makes a lot of announcements and advertisement in the newspaper as well as flat rates and special offers. I think it is also important whether the hairdresser is older and normal or modern, young and lively. What would need to be true for the firm to be a pure monopoly is that there is no other hairdresser in Zurich and vicinity.

Short answer questions

1. With the help of a diagram, explain how it is possible for a firm in perfect competition to earn abnormal profits in the short-run.

The short run is a fixed plant period, which means that a firm is facing fixed costs as well as variable costs. The fixed costs are the costs of fixed assets a fgbirm uses, such as interest rate or land rent. Variable costs are the costs for each worker (wages). In the short run, firms can't enter or exit a market. Perfect competition is a market structure in which all firms sell an identical product. In a perfect competitive market all firms have a relatively small market share, there are no barriers to entry or to exit the market and they have a small and an equal size. Firms in perfect competitive markets are price takers which mean that they have no say in changing the prices of their product. They have to set the price as the market demands.
It is possible for a firm in perfect competition to earn abnormal profits in the short-run when it is covering more than their total costs, including their opportunity cost. A firm maximizes its profit when the marginal costs equal to the marginal revenue. It is producing at the industry price (P) and it is maximizing its profits by producing at the quantity (q). At q the costs per unit is C whereas the revenue per unit is P. Therefore the average cost is less than average revenue and the firm is making an abnormal profit on each unit (P-C). Because of the attraction of the abnormal profit to other producers, who will then enter the market, making abnormal profits is only possible in the short run. Due to the attraction and the increase in the number of firms in the market, the supply increases and the supply curve shifts to the right (S1). The price decreases from P to P1.

2. With the help of a diagram, explain how it is possible for a firm in perfect competition to earn abnormal profits in the long run.

The long run is also calls "variable plant period", which means that every cost a firm faces, such as rent, wages or interest rate, is variable. There are no fixed costs. Since the long run is the planning period, the costs a firm faces can be changed over time. Small firms which produce the same product outside of the market will start to entry the market because they are attracted by the chance of making abnormal profits. However, the more firms enter the market to make abnormal profits; the market supply for the product will increase rapidly. Therefore the supply curve shifts from S to S1. Since the firms in an industry are price takers, the price for the product will decrease. This leads to a downward shift in the demand curve. This means that the abnormal profits will start to be "competed away" and the firms make normal profits. Since the firms make normal profits, there is no attraction for other firms. Therefore the market will stay at the new equilibrium. Entrepreneurs are satisfied because they are covering all their costs, including opportunity costs.

3. Explain whether or not a firm in perfect competition earning abnormal profits is productively efficient.

However, a firm makes abnormal profits by maximizing its profit. In order to maximize its profits the firm produces at the quantity, where marginal costs=marginal revenue, as well as when the average total cost is less than the average revenue. There are two types of efficiency: Productive efficiency and allocative efficiency. Productive efficiency is when a firm in perfect competition is producing its product at the lowest possible unit cost (P= minimum ATC). The productivly efficient level is where MC=AC. When a firm is producing productively efficient they combine their resources as efficiently as possible, this means that resources are not being wasted by inefficient use. Allocative efficiency is also called the "socially optimum level of output", which means that this is also a point where a firm maximizes its profits. It is being defindes as P=MC=MR. When a firm is allocative efficient it produces the right amount so that the supply equals the demand. However, when the price is greater than the marginal cost, the producers know that demand for the product is higher. When the price is lower than the marginal cost, the product is not as much demanded as being produced. In the end it is clear that a firm in perfect competition is not producing at the most productvley efficient level of output. Hence it produces allocativley efficient.