Question

Ingvar and Olaf are the only two fishermen in their area. Each has been assigned an ITQ that allows him to catch 20 tons of salmon. Ingvar's \(\mathrm{MC}\) of catching salmon is \(\$ 6\) per ton while Olafs MC of catching salmon is \(\$ 7\) per ton. If the price of salmon is \(\$ 10\) per ton, then to maximize efficiency, the two guys should trade ITQs until Ingvar is in charge of catching _____ tons while Olaf catches ____ tons. a. \(20 ; 20\) b. \(30 ; 10\) c. \(40 ; 0\) d. \(0 ; 40\)

Short answer

c. 40; 0

Step-by-step solution

Identify Given Information

We are given that Ingvar's marginal cost (MC) of catching salmon is \(\\(6\) per ton, and Olaf's MC is \(\\)7\) per ton. The price of salmon is \(\$10\) per ton. Each has an ITQ to catch 20 tons.

Determine Efficiency

Efficiency is maximized when total profits are maximized. Profit per ton is calculated as the price minus the MC. For Ingvar, profit per ton is \(10 - 6 = 4\), and for Olaf, it is \(10 - 7 = 3\). Thus, Ingvar will make more profit per ton than Olaf.

Assign ITQs to Maximize Profit

To maximize total profits, all salmon should be caught by the fisherman with the lowest MC (highest profit per ton), which is Ingvar. This means Ingvar should catch all 40 tons (20 + 20) allowed by both ITQs while Olaf catches none.

Key concepts

Individual Transferable Quotas (ITQs)

Individual Transferable Quotas (ITQs) are a fascinating tool in fisheries economics. These quotas guarantee a fisherman the right to catch a certain quantity of fish, in this case, salmon.
What's interesting about ITQs is their transferability. This means fishermen can trade their quotas among each other. Such a system allows for significant flexibility and efficiency in the allocation of resources. Instead of being fixed to an equal quota share regardless of efficiency, fishermen can trade quotas, benefiting those who can fish at a lower cost. It creates a marketplace for fishing rights, encouraging effective resource use.
This system aims to promote sustainable fishing, reduce overfishing, and increase economic efficiency. In essence, ITQs help allocate fishery resources optimally, based on who can use them best.

Marginal Cost (MC)

Marginal Cost (MC) is a vital concept in understanding how resources should be allocated efficiently in any economic scenario. It refers to the cost of producing one additional unit of a good, in this case, catching an extra ton of salmon.
For Ingvar, the MC is $6 per ton, which is lower than Olaf's, $7 per ton. This indicates that Ingvar can catch each additional ton of salmon more cheaply than Olaf.
In economic terms, the goal is to minimize costs to maximize profits. When deciding on whom should handle more resources, a lower MC suggests higher efficiency, leading to better resource allocation. Hence, in this exercise, Ingvar, with a lower MC, should be catching more salmon to improve overall efficiency.

Profit Maximization

Profit Maximization is the primary objective of any business activity, including fisheries. It's achieved when the difference between total revenue and total costs is the greatest.
Let's break it down with Ingvar and Olaf's situation. Our revenue per ton is consistent at $10, as per the salmon market price.
Profits per ton are calculated by subtracting the marginal cost from this revenue. Ingvar makes $10 - $6 = $4 per ton, while Olaf makes $10 - $7 = $3 per ton. Thus, Ingvar has a higher profit margin per ton.
To maximize the collective profit, it makes sense to allocate more resources (ITQs) to Ingvar. This ensures that their output is produced at the lowest cost, achieving maximum profitability.

Resource Allocation

Resource Allocation is about wisely distributing available resources to achieve maximum efficiency and productivity. In the context of fisheries, this means determining how much fish each fisherman should catch while considering costs and profits.
In our problem, effective resource allocation means assigning the fishing quotas to Ingvar, who has the lowest marginal cost. This decision ensures that fish are harvested at the minimal total cost, capitalizing on Ingvar's advantage in productivity.
It's a critical economic decision because resources like salmon are limited. By transferring Olaf's quotas to Ingvar, the allocation mirrors optimal resource utilization. This leads to enhanced efficiency and greater profitability, benefiting both the fishermen and the environment in the long run.