A small village has six people. Each can either fish in a nearby lagoon or work in a factory. Wages in the factory are $4/ day. Fish sell in competitive markets for $1 apiece. If L persons fish the lagoon, the total number of fish caught is given by F = 8L - 2L2. People prefer to fish unless they expect to make more money working in the factory.
a. If people decide individually whether to fish or work in the factory, how many will fish? What will be the total earnings for the village?
b. What is the socially optimal number of fishermen? With that number, what will the total earnings of the village be?
c. Why is there a difference between the equilibrium and socially optimal numbers of fishermen?