Exercise 3 Decreasing returns and property rights In the example of the fishery in section 3.1,

a) argue that the presence of diminishing returns is a necessary condition to explain the presence of negative externalities in free access. (Suggestion: Proceed by contradiction.)

b) argue that the presence of diminishing returns is not sufficient to explain the presence of negative externalities. This argument of a solution by the right of property, attributed to Gordon (1954), is certainly elegant and useful for better understanding the problem of overfishing. It is however rather theoretical, even utopian. To see this, let's do the following thinking exercise. Suppose that the new owner of the fishery hires a supervisor whose task is to maximize rents. This supervisor must therefore reduce the fishing effort by excluding the XLA - X amount of effort. That done, the net return for an excluded who would add a unit of effort would be p (f (X ) / X ) - c, that is to say strictly positive. This excluded therefore has an interest in violating the right to property by not respecting the decision of the supervisor. If we imagine a situation with several excluded, the supervisor will have to find 16 the means to enforce his decision. These property rights defense activities do not, of course, come without costs; real resources must be devoted to it in the form of work (guards, police, lawyers, ...), capital (guns, police vessels, prisons, ...), and others. Consequently, when the time comes to compare the efficiency of the equilibria at points A and B in Figure 3.1, it will also be necessary to take into account the costs of protection

associated with the creation of property rights.2

14 B c p40X2 pf'(X) X Figure 3.1: L'quilibre en libre-accs 14 B c p40X2 pf'(X) X Figure 3.1: L'quilibre en libre-accs