Consider an island with exclusive fishing rights to their own waters. The fishing industry is unregulated and the production function, representing the yearly catch, is given by f ( x )=22 x 2^x /40

 

where x is the number of boats launched. Yearly industry profit is split equally among fishing boats and the cost of launching a boat equals 80. Fish is sold at a world market price of p=40. A market failure is likely to occur in this market. Explain why and analyze the problem by comparing the profit maximizing solution for the fishing industry with “sustainable” fishing (revenue maximizing solution) and the free entry solution. Suggest a policy that leads to an efficient outcome.

Answer rating: 100% (QA)

The market failure in this scenario arises due to the unregulated nature of the fishing industry leading to overexploitation of the fishery resources ... View the full answer