Question

The Great Pacific Tuna Cartel Price and cost (dollars per ton) MSC 300- 250 Eight small Pacific islands with control of 5.5 million square miles of prime tuna fishing waters, have tripled the access fee for U.S. tuna fishers from $21 million to $63 million and increased monitoring of fishing in these waters. Source: The Wall Street Journal, March 20, 2013 Explain how the Pacific islands' action influences the efficiency of the use of tuna resources and illustrate your answer with a graph of the tuna market 200- MC + fee 150 The Pacific islands' action makes the use of tuna resources 100 50- A. more efficient because U.S. tuna fishers are faced with more of the cost of their fishing B. less efficient because the marginal external cost from fishing decreases C. more efficient because the marginal external cost from fishing increases D. less efficient because now U.S. tuna fishers can afford to catch less fish 0- 0 MSB 40 80 120 160 Quantity (thousands of tons per month) >>> Draw only the objects specified in the question. The graph shows the marginal private cost curve plus the original fee, the marginal social cost curve, and the marginal social benefit curve in the market for tuna, Draw a point to show the overfishing equilibrium with the original fee. Label it 1 Draw a shape to show the deadweight loss that results when the original fee is charged. Now suppose that the Pacific Islands' action is such that the fishers now face the external cost that results in an efficient outcome. Draw a point to show the new equilibrium. Labelit 2.

Answer 1

(1) (A)

Increase in cost of fishing will reduce quantity of fishing, increasing efficiency.

(2) Initial equilibrium is at point 1 with price $100 and quantity 80,000.

(3) Deadweight loss is area of the black-bordered triangle.

(4) Efficient outcome is at point 2 with price $150 and quantity 40,000.

Price and cost (dollars per fon) MSC 300- 250 200 MC + fee N 150 100 1 50- MSB 160 40 80 120 Quantity (thousands of tons per month) >>> Draw only the objects specified in the question.