Nova workboard

a blog from young economists at Nova SBE

The evilness in microeconomics

Winter is coming: and with it, Christmas – lights, pine trees and supermarkets filled with Cod, enough to feed a starving country. In no Portuguese table is this dish missing when Santa comes running down the chimney; more of the good is always preferred to less of it! With such abundance, who could even realize that codfish is actually in the edge of extinction? As long as market needs are satisfied and demand meets supply in an apparently perfect market equilibrium, there is no reason for alarm.

The story, however, deepens. Environment and sustainability enter the equation when externalities are considered. Put in simple terms, an externality occurs whenever a cost or benefit that affects an unrelated third party, and is not taken into account in the market transactions, arises. In this case, the externality is negative, affecting the whole ecosystem where we live: the outcome of economic interactions will undoubtedly involve inefficiencies, tearing apart consumers’ idea of a fairy tale. If the externality in production arises when no property rights are well defined – the ocean’s case – one could talk about the particular scenario called the tragedy of the commons: Being the oceans privately owned, cod would only be fished until the point where the marginal product of one fish would equal its cost. Since it’s not, this exploration will continue to happen until profits are driven to zero.

It sounds cruel, that one the most important keyword, amongst everything that could have been said, is actually… profits. Profits of the fishermen; Profits of the companies who rule fishermen’s stocks of fish. Profits of those that sell, in last instance, to us, massive and compulsive consumers. If more radical conservative measures were undertaken, cod might still have a chance to grow back to a sustainable thriving population; but then again, such measures would, first and foremost, imply an even harsher decline on quantity, which would make producers and consumers extremely unhappy.

In order to regulate the fishing and consumption of cod (and other fishes) a system of quotas was implemented. Each country gets a part of the overall quota determined for the species, based on the projections scientist make of the population. They are attributed yearly by the EU. Although these quotas try to follow researcher’s advice, this is not always the case, and after an apparently increase in the cods population, quotas rose until the cod population crashed inevitably, by 2001. From 2001 to 2008 ICES (the main responsible and adviser of cod population research) advised a 0 ton quota if the species were to avoid extinction. This was not followed and although the quotas decreased, they were still too high for a sustainable fisheries. Currently, cod is listed as vulnerable by the IUCN (entity responsible to attribute a status of species population), which means it is facing high risk of extinction in the wild, reaching lower maximums every year.

Specialists are now finding these populations to have cyclical shifts in size, meaning that in some years, the population might seem to be in decline and others proliferating. Taking advantage of this cyclic nature, the quotas for the cod increased in recent years, as to represent an equal increase in the cod’s population.  In 2013, after hours of negotiation, EU allowed an increase of 20% of this fish’s capture to Portugal alone. It appeared all over the news as a “good sign”. More revenues, more profits, more economic growth!

Producers are able to satisfy consumer’s needs; governments manage to increase productivity while stating sustainability. We succeed in creating a new recipe for this Christmas Eve. Economics explains where and how the efficient equilibrium is achieved … Supply will meet demand again, far away from the quota limit; and this works just fine for whoever takes advantage of this so profitable market.

#701

Izaura Pires-de-Carvalho

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Author: studentnovasbe

Master student in Nova Sbe

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