In the article \"Catching Crabs in Alaska\", the author discusses the regualtion

Question

In the article "Catching Crabs in Alaska", the author discusses the regualtions that are set in place to limit the number of crab caught to avoid overfishing. Previous regualtions set a quota for the entire industry, and firms raced to catch crab before the quota was filled. Write a one page essay answering the following.

1) How could regulation be used to pretoect against overfishing?

2) What was the problem with the old quota system? How is the new system an improvement?

3) What are some problems with the use of regulation to address a public goods problem?

Explanation / Answer

1. Fishing in a pond is an example of common resource. A common resource is one which is non-excludable, but rival. It means that while one cannot be prevented from using the resource, one's use of the resource diminishes another's utility from it. People consider only the private marginal cost when they should be considering the social marginal cost. This leads to over-fishing becuase the private marginal cost is lesser than the social marginal cost.

In such a case, regulation in the form of limiting the number of crabs caught will ensure that socially optimum quantity of crabs are caught.The number of crabs that each firm can catch can be specified. If a partcular firm wants to increase its production, it can bargain with other firms in the market to reduce their production. This bargain can take form of quota rents and will lead to the efficient allocation of quotas in the market. The firm with a lesser cost of catching crabs wil find it profitable to increase its quota by purchasing the license from other firms. On the other hand, inefficient firms can exit the market by selling their quota.

2. The problem with the old quota was that it was not efficient. If the inefficient firm reached first and caught crabs, there would be no solution to it. Also, the old system was dangerous as the fishermen would compete with each other in a restricyive time window and it would lead to a lot of accidents.

The new system is an improvement as it allows fishing at a more relaxed pace. Also, the inefficiciency in the system has been resolved. The transition to quota system is also supposed to increase the value of the crabs.

3. People hide their actual preferences so that they can free ride on the public good provision.

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