The village of Ectenia has ten residents. Villagers can earn income by either we
ID: 1250606 • Letter: T
Question
The village of Ectenia has ten residents. Villagers can earn income by either weaving baskets or fishing. Because the lake has a limited number of fish, the more villagers fish, the less each catches. In particular, if n households fish in the lake, the each fishing household makes an amount:I=12-2n
where I is daily income measured in dollars. The income that a household makees by weaving baskets is $2 a day.
a. Assume that each household makes the decision of whether to weave baskets or fish in the lake independently. How many households do you expect to see fishing each day? How many households do you expect to see weaving baskets? (Hint: Think about opportunity cost.) Calculate the total income of the village in this equilibrium.
b. Show that, when 3 households fish in the lake, the total income of the village is larger than the one you found in part (a). What prevented the villagers from reaching this higher-income allocation of resources when they acted independently?
c. If the villagers together decided to achieve the allocation in part (b), what kinds of rules would the need to institute? If they wanted everyone to benefit equally in the new system, what kind of tax and transfer system would they need?
d. What type of good is the fishery? What characteristics make it that type of good?
Explanation / Answer
a. Households would choose to fish as long as they got at least as much revenue from fishing as from basket-weaving. In this case, until $12 - 2n = $2, or until n=5 fishers. There would also be 10-5=5 weavers. Everyone earns $2, so village income is $2*10 = $20. b. If 3 families fish, the waves of a fisher are 12-2*3 = $6. These three fishers earn $18, and the 7 weavers earn 14, for a total village income of $32. However, we are prevented from staying at this outcome if everyone behaves independently: one of the weavers would notice that he could switch to fishing, and the wage with 4 fishers is $4, better than weaving --- so he would indeed make the switch. c. If we wanted to achieve this outcome, we would need to tax each fisher $2.80 and compensate each non-fisher $1.20. This gives each person a net benefit of either $6-$2.80 = $3.20 or 2 + $1.20 = $3.20, so there's no incentive for weavers to change into being fishers. d. The fishery is a "common good", because it is non-exclusionary (anyone can access it), but it is rivalrous (meaning that one person's benefit is reduced by other people using it.)
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