Answered: Suppose the U.S. National Marine…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the U.S. National Marine Fisheries Services (NMFS) is considering to implement one of the two policies on fishers in the Gulf of Mexico with an objective to reduce sea turtle bycatch. Policy A: regulation - an allowable bycatch standard (number of turtles) for each fisher. If the fisher violates the bycatch standard (catching more turtles than the standard allows) at the end of the fishing season, he has to pay a lump sum fine. Policy B: a bycatch tax on each bycatch (each turtle caught). Let us assume NMFS has a perfect monitoring system to see how many turtles are being caught. If policy A implemented, each fisher can either meet the standard by adjusting his fishing behavior. Or, he can pay the fine and harvest as much he wants to maximize his profits without worrying about sea turtle bycatch. If the fisher meets the standard, his profit is $3500 and NMFS benefit is 500units (think of it as benefit to society from reduced sea turtle bycatch). If the firm chooses to pay the fine, fisher’s profit is $2500 and NMFS benefit is $400 ( no benefit from reduced turtles but NMFS can use $400 for conservation efforts to protect turtles). If policy B is implemented, fisher can either 1) adjust his fishing behavior, stay away from sea turtles and not pay taxes, 2) save on the cost of altering his fishing choices but pay taxes. In reAlity, fishers will typically choose to abate till the efficient level and then pay tax for the remaining amount. Abstract from this scenario for now and construct your tree using the options given to you in the problem. If fisher chooses to abate, firm profit is $3000 and NMFS benefit is $400. If firm chooses to pay taxes, firm profit is $3200 and NMFS’s benefit is $300. A) Draw the game tree and label each part of the tree. B) Show the subgame perfect Nash Equilibrium (SPNE) on your tree. Clearly write out the equilibrium strategies of each player. Fir player 2, write out what will be his/her best option at each node of the game tree. It is not just what he/she will do on the equilibrium path.

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