12 May WHAT QUESTION IS THE THEORY OF CAPITAL DESIGNED TO ANSWER?
1. Economists regard all natural resources as ânaturalâ capital. Consequently, instudying the economics of the management of these resources, economists arecompelled to bring to bear both the theory of capital and the theory of investment.While the two theories are closely linked, there is a difference between the two.What question is the theory of capital designed to answer? What question is thetheory of investment designed to answer?The World Bank/FAO publication, The Sunken Billions, to which we referredmany times, argues that many of the worldâs capture fishery resources were overexploited in the past and must be rebuilt, if they are to make their full economiccontributions to the world economy. Discuss how the theories of capital andinvestment could be applied in designing a rebuilding for any one of thesehitherto overexploited capture fishery resources, e.g., Southern bluefin tuna.2. (a) Consider now a newly planted stand of trees. The trees are to be grownfor their commercial value alone. What decision rule should be employed fordetermining the âoptimalâ investment in the trees â the optimal rotation â giventhat the stand of trees is being managed on a Single Rotation basis? Explain.(b) Now suppose that the stand, to be used for the commercial value of the treesalone, is, instead to be managed on a Multiple Rotation basis, rather than aSingle Rotation basis. What impact would managing the stand on a Multiplerotation, as opposed to a Single Rotation, basis upon the optimal rotation period?Would it be correct to say that the opportunity to use the forest land over andover again for growing trees, under Multiple Rotation, would lead to the rotationperiod being longer than it would be under a Single Rotation basis? Explain fully.(c) Stands of trees are not always managed for the commercial values of thetrees alone. Non-market values (what your text refers to as non-timber values)can prove to be very important. After listing some of the non-market values thatcan arise from stands of trees, show that, if the stand is being managed on aSingle Rotation basis, it is possible, once non-market values are taken intoaccount, that the optimal time of rotation will be: t = ! , i.e. it is optimal the neverto cut down the trees on the stand.23. According to the dynamic (capital-theoretic) economic model of the fisherystudied by you, a positive investment in a fish resource will have a payoff interms of additional sustainable resource rent. Assume for the moment that thesustainable resource rent arises from commercial additional values alone. Thereare then seen to be two components to the additional sustainable resource, withthe first being the impact of the resource investment upon sustainable harvests.The second is captured in what we have referred to as the Marginal Stock Effect,which may, or may not be positive. What exactly is meant by the term MarginalStock Effect?It has been argued that, if sustainable resource rent is based upon commercialvalues alone, and if the Marginal Stock Effect, as defined by you, is equal to zero,a social manager might rationally decide to drive the resource to the brink ofextinction. How is this possible? Explain.In point of fact, in many countries, Canada being one of them, the socialmanager does not, in managing fishery resources, focus on commercial valuesalone. The fishery resources are seen to have a so called âexistence valueâ overabove the commercial value of the harvests. What is meant by the termâexistence valueâ? On what grounds can it be argued that, if the existencevalues of fishery resources are deemed to be positive, as they are in Canada, thesocial manager would never drive the resource to the brink of extinction? Explain.4. What, we have termed Limited Entry Type 1 schemes in fisheries, in whichthe limited number of vessels compete among themselves for the shares of theTAC, or equivalent thereof, have usually produced disappointing results. AsBruce Turris pointed out in his lecture, the B.C. groundfish fisheries provide vividexamples. Why have such straightforward management schemes producedsuch negative results?The alternative used in the B.C. groundfish fisheries consist of ITQ schemes.Explain the basic nature of such schemes. It used to be believed that ITQschemes are unworkable in multi-species fisheries. On what grounds doesBruce Turris (along with others) argue that ITQ schemes do, in fact, come intotheir own in multi-species fisheries? Explain fully.5. International fisheries, those exploited by two or more states, invariablyinvolves a strategic interaction between/among those states. For this reason,economists studying the economic management of such fisheries, are compelledto apply the theory of strategic interaction better known as the theory of games.In applying the theory of competitive (non-cooperative) games to non-cooperativemanagement of international fishery resources, economists predict that suchnon-cooperative management carries with it the risk of very inferior outcomes.Why is this so? Confine your discussion to transboundary fish stocks.3If cooperation does matter in the management of international fisheries, theneconomists must bring to bear the theory of cooperative games. They givepreference to the theory of cooperative games developed by John Nash. Thebiggest problem is bringing stability to the cooperative fishery managementarrangement. According to Nash, what are the two fundamental conditions thatmust be met, if the solution to any cooperative games is to prove to be stable?Explain.What, in the context of an international fisheries cooperative game, is meant bythe concept of âside paymentsâ. What role can side payments play in the fulfillingof the aforementioned two fundamental conditions? On what grounds can it beargued that side payments are likely to be particularly important, if the statessharing the fishery resource have different resource management objectives?Explain, confining yourself, once again, to the case of transboundary fish stocks.
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