Most commercial fish species in nearly every ocean and sea are being rapidly depleted in what marine biologists and other specialists warn is evolving into one of the worst ecological disasters of modern times. According to the United Nations, the world’s 15 million fishermen and 23 million tons of fishing vessels represent twice as much fishing power as major stocks of fish can sustain. Assume that ocean fishing resembles a competitive market in the following ways: 1. there are no significant barriers to entry and 2. there are enough individual fishermen so that none of them can affect the market price of fish.

Question

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2. Explain why competitive markets normally lead profit maximizing firms to make choices about resource use that lead to an efficient allocation of resources to the market?

2. If unregulated competitive markets promote efficient patterns of resource use, why has unregulated competition led to such serious overallocation of resources to fishing?

Thanks

Answer 1

A) When firms in competitive markets maximize profits by expanding Q until MC= P, they are devoting resources to their highest valued use. (since consumers expand their purchases until MU=P, MU=MC when firms expand Q until MC=P.)

B)In order to maximize profits, monopolists will expand output only until MR = MC. But (MR < P)--since the monopolist faces a downward sloping demand schedule. Meanwhile consumers expand their purchases of the good produced by the monopoly until MU=P. Therefore, in monopolistic equilibrium. MC=MR< P=MU or MC <MU. In other words, too few resources are devoted to goods produced under monopoly conditions

Answer 2

Gaz's answer to the first question isnt too bad, his answer to the second is completely off base; the answer has nothing to do with monopolies. Sorry Gaz.

For the first, profit maximizers will allocate resorces to maximize their profits, which means using the resources to create items which have the highest profit margins (including opportunity costs). Since the resources are going to their highest valued use, and all costs and benefits are fully accounted for, the allocation of those resources is efficient.

Now then, in the case of the fishery, the firsherman does not bear the full cost of catching a fish. With each fish caught, the fisherman is reducing the ability of the fishery to repopulate itself. Equally important, with each fish caught, the fisherman raises the marginal costs for all other fisherman. That is, the fisherman is maximizing according to his own internal marginal costs (gear, fuel, time, etc.). The fisherman does not take into account the externalities he imposes on others. Hence, the fishery is over-fished.

In short, everybody's resource is nobody's resource.