NOAA Technical Report NMFS 94 November 1990

An Economics Guide to Allocation of

Fish Stocks between Commercial

and Recreational Fisheries

Steven F. Edwards

u.S. Department of Commerce
NOAA Technical Report NMFS _

The major responsibilities of the National Marine Fisheries Service ( MFS) are to monitor and assess the abundance and geographic distribution

of fishery resources, to understand and predict fluctuations in the quantity and distribution of these resources, and to establish levels for their optimum

use. NMFS is also charged with the development and implementation of policies for managing national fishing grounds, development and enforcement

of domestic fisheries regulations, surveillance of foreign fishing off United States coastal waters, and the development and enforcement of international

fishery agreements and policies. NMFS also assists the fishing industry through marketing service and economic analysis programs, and mortgage insurance and vessel construction subsidies. It collects, analyzes, and publishes statistics on various phases of the industry.

The NOAA Technical Report NMFS series was established in 1983 to replace two subcategories of the Technical Reports series: "Special Scientific

Report-Fisheries" and "Circular." The series contains the following types of reports: Scientific investigations that document long-term continuing

programs of NMFS; intensive scientific reports on studies of restricted scope; papers on applied fishery problems; technical reports of general interest

intended to aid conservation and management; reports that review in considerable detail and at a high technical level certain broad areas of research;

and technical papers originating in economics studies and from management investigations. Since this is a formal series, all submitted papers receive

peer review and those accepted receive professional editing before publication.

Copies of NOAA Technical Reports NMFS are available free in limited numbers to governmental agencies, both Federal and State. They are also

available in exchange for other scientific and technical publications in the marine sciences. Individual copies may be obtained from: U.S. Department

ofCommerce, National Technical Information Service, 5285 Port Royal Road, Springfield, VA 22161. Although the contents have not been copyrighted

and may be reprinted entirely, reference to source is appreciated.

69. Environmental quality and aquaculture systems: Proceedings of the

thirteenth U.S.-Japan meeting on aquaculture, Mie, Japan, October 24-25,

1984, edited by Carl J. Sindermann. October 1988, 50 p.

70. New and innovative advances in biology/engineering with potential

for use in aquaculture: Proceedings of the fourteenth U.S.-:Japan meeting

on aquaculture, Woods Hole, Massachusetts, October 16-17, 1985, edited

by Albert K. Sparks. November 1988, 69 p.

71. Greenland turbot ReinhardJius hippogwssoides of the eastern Bering Sea

and Aleutian Islands region, by Miles S. Alton, Richard G. Bakkala, Gary

E. Walters, and Peter T. Munro. December 1988, 31 p.

72. Age determination methods for northwest Atlantic species, edited

by Judy Penttila and Louise M. Dery. December 1988, 135 p.

73. Marine flora and fauna of the Eastern United States. Mollusca:

Cephalopoda, by Michael Vecchione, Clyde F. E. Roper, and Michael

J. Sweeney. February 1989, 23 p.

74. Proximate composition and fatty acid and cholesterol content of22

species of northwest Atlantic finfish, by Judith Krzynowek, Jenny Murphy, Richard S. Maney, and Laurie J. Panunzio. May 1989, 35 p.

75. Codend selection of winter flounder PseudJJpleurorw:tes amtrU:anus, by

David G. Simpson. March 1989, 10 p.

76. Analysis offish diversion efficiency and survivorship in the fish return

system at San Onofre Nuclear Generating Station, by Milton S. Love,

Meenu Sandhu, Jeffrey Stein, Kevin T. Herbinson, Robert H. Moore,

Michael Mullin, and John S. Stephens Jr. April 1989, 16 p.

77. Illustrated key to the genera offree-living marine nematodes of the

order Enoplida, by EdwinJ. Keppner and Armen C. Tarjan. July 1989,

26 p.

78. Survey of fishes and water properties of south San Francisco Bay,

California, 1973-82, by Donald E. Pearson. August 1989, 21 p.

79. Species composition, distribution, and relative abundance of fishes

in the coastal habitat off the southeastern United States, by Charles A.

Wenner and George R. Sedberry. July 1989, 49 p.

80. Laboratory guide to early life history stages of northeast Pacific fishes,

by Ann C. Matarese, Arthur W. Kendall Jr., Deborah M. Blood, and

Beverly M. Vinter. October 1989, 651 p.

81. Catch-per-unit-effort and biological parameters from the Massachusetts coastal lobster (Homarus americanus) resource: Description and Trends,

by Bruce T. Estrella and Daniel J. McKiernan. September 1989, 21 p.

82. Synopsis of biological data on the cobia RQI;hyctnJron ctullJdum (Pisces:

Rachycentridae), by Rosalie Vaught Shaffer and Eugene L. Nakamura.

December 1989, 21 p.

83. Celaphopods from the stomachs of sperm whales taken off California, by Clifford H. Fiscus, Dale W. Rice, and Allen A. Wolman. December 1989, 12 p.

84. Results of abundance surveys ofjuvenile Atlantic and Gulf menhaden, Breooortia tyrannus and B. patrunus, by Dean W. Ahrenholz, James F.

Guthrie, and Charles W. Krouse. December 1989, 14 p.

85. Marine farming and enhancement: Proceedings of the Fifteenth

U.S.-Japan Meeting on Aquaculture, Kyoto, Japan, October 22-23, 1986,

edited by Albert K. Sparks. March 1990, 127 p.

86. Benthic macrofauna and habitat monitoring on the continental shelf

of the northeastern United States. I. Biomass, by Frank Steimle. February 1990, 28 p.

87. Life history aspects of 19 rockfish species (Scorpaenidae: &hastes) from

the Southern California Bight, by Milton S. Love, Pamela Morris, Merritt McCrae, and Robson Collins. February 1990, 38 p.

88. Early-life-history profiles, seasonal abundance, and distribution of

four species of clupeid larvae from the northern Gulf of Mexico, 1982 and

1983, by Richard F. Shaw and David L. Drullinger. April 1990, 60 p.

89. Early-life-history profiles, seasonal abundance, and distribution of

four species of carangid larvae off Louisiana, 1982 and 1983, by Richard

F. Shaw and David L. Drullinger. April 1990, 37 p.

90. Elasmobranchs as living resources: Advances in the biology, ecology,

systematics, and the status ofthe fisheries, edited by Harold L. PrattJr.,

Samuel H. Gruber, and Toru Taniuchi. July 1990, 518 p.

91. Marine flora and fauna ofthe northeastern United States, Echinodermata: Crinoidea, by Charles G. Messing and John H. Dearborn. August

1990, 30 p.
NOAA Technical Report NMFS 94

An Economics Guide to Allocation of

Fish Stocks between Commercial

and Recreational Fisheries

Steven F. Edwards

November 1990

u.s. DEPARTMENT OF COMMERCE

Robert Mosbacher, Secretary

National Oceanic and Atmospheric Administration

John A. Knauss, Under Secretary for Oceans and Atmosphere

National Marine Fisheries Service

William W. Fox Jr., Assistant Administrator for Fisheries
The National Marine Fisheries Service (NMFS) does not approve,

recommend or endorse any proprietary product or proprietary

material mentioned in this publication. No reference shall be made

to NMFS, or to this publication furnished by NMFS, in any advertising or sales promotion which would indicate or imply that NMFS

approves, recommends or endorses any proprietary product or proprietary material mentioned herein, or which has as its purpose

an intent to cause directly or indirectly the advertised product to

be used or purchased because of this NMFS publication.

Text printed on recycled paper

II
An Economics Guide to Allocation of Fish Stocks between

Commercial and Recreational Fisheries

STEVEN F. EDWARDS

Economics Investigation Unit

Northeast Fisheries Center

National Marine Fisheries Service

National Oceanic and Atmospheric Administration

Woods Hole, MA 02543

ABSTRACT

The increasingly intense competition between commercial and recreational fishermen for access

to fish stocks has focused attention on the economic implications of fishery allocations. Indeed,

one can scarcely find a management plan or amendment that does not at least refer to the relative

food and sport values of fish and to how expenditures by commercial and recreational fishermen

on equipment and supplies stimulate the economy. However, many of the arguments raised by

constituents to influence such allocations, while having an seemingly "economics" ring to them,

are usually incomplete, distorted, and even incorrect. This report offers fishery managers and

other interested parties a guide to correct notions of economic value and to the appropriate ways

to characterize, estimate, and compare value. In particular, introductory material from benefitcost analysis and input-output analysis is described and illustrated. In the process, several familiar

specious arguments are exposed.

Introduction _

Competition between commercial and recreational fishermen for fish, although certainly not new, is intensifying

as a direct result of increased demand for seafood, increased

participation in marine recreational fishing, and, in many

cases, reduced stock sizes. Consequently, fishery managers

throughout the United States and the world are increasingly confronted with allocating fish stocks between commercial and recreational fishermen. For example, the

federal Regional Fishery Management Councils recently

allocated redfish in the Gulf of Mexico, coho and chinook

salmon in the Pacific, and billfish species in the northwest

Atlantic to these user groups. Allocation of many other

shared species, such as sharks, is imminent.

Given the financial stakes in having access to a fish stock,

it is not surprising that economics receives increased

attention when fishery allocations are contended. Unfortunately, many contemporary arguments which are advanced by user groups and related constituencies, while

having an apparently reasonable "economics" ring to

them, are usually incomplete, distorted, and even incorrect. For example, commercial fishermen sometimes

characterize sport fishing as the adult-equivalent of playsomething devoid of economic value. This' 'market valueargument" is incorrect, however, because it presumes that

only markets beget economic value. As another example,

game fish status is often advocated for a fishery resource,

such as billfish, when revenues from anglers' expenditures

on fishing supplies are greater than dockside revenue in

the commercial fishery for the same species. Among the

mistakes inherent in this "revenues-argument," however,

is that it contradicts any rational desire of an angler or

business to minimize the costs of fishing.

One danger of these and other biased arguments or

perceptions is that they could undermine management

which is designed to enhance the economic value that all

Americans derive from their publicly owned fish stocks.

Indeed, to optimize the economic value offish used for food

and sport is one ofthe primary objectives of the Magnuson

Fishery Conservation and Management Act-an objective

that justifies government management of common prop·

erty fisheries. Yet, management which is based on inappropriate (as well as insufficient) economics data and

analyses will fall well short of this justification, and it could

be challenged and delayed after receiving required professional reviews. Even plans actually approved by higher

authorities, such as the Secretary of Commerce in the case

of federal fishery management, could later be withdrawn

or reversed after the appropriate data are collected and
2 NOAA Technical Report NMFS 94 _

analyzed correctly. Clearly, the need to elucidate the economics of allocation between commercial and recreational

fisheries is present, great, and increasing.

Every discipline has unique jargon which facilitates communication among its rank and file, but which also confuses and alienates others. Economics, with its sometimes

bewildering confluence with mathematics and statistics, is

an extreme example of this problem, especially when applied to fishery allocations. Thus, economists are obligated

to make their subject accessible to others if we hope to see

economic analyses applied correctly. An understanding of

benefit-cost analysis and input-output analysis is particularly important. Accordingly, this guide was written with

three purposes in mind: 1) to expose specious economicssounding arguments common in the public debate of

fishery allocation; 2) to offer those with an interest in fishery

management a foundation of economic concepts, principles, and methods which are germane to fishery allocation; and 3) to promote sound economic analyses and comparisons of the economic value of commercial and recreational fisheries.

Throughout this guide, bear in mind the distinction

between the quality of an analysis and its appropriateness.

The quality of any analysis, such as a stock assessment or

a benefit-cost analysis, is constrained by available data,

the state of the art in research methodologies, and, of

course, manpower and budgets. In contrast, no amount

of data or no methodology-no matter how accurate or

eloquent-can shed light on the allocation debate when

they are inappropriate. Particularly worrisome is the

misuse of purely financial information, such as expenditures and revenues, and input-output analysis to assess

the economic values of commercial and recreational

fisheries.

Instead, what is needed is an understanding of how data

on expenditures and revenues can be correctly used, within

the context of benefit-cost analysis, to measure the economic

value offish in commercial and recreational uses. Accordingly, this guide offers fishery managers, policy makers,

and others with an interest in fishery management a foundation in the concepts, principles, and methodology of

benefit-cost analysis. However, this guide was not intended

to be a handbook or "recipe" for the actual execution of

benefit-cost analysis by practitioners. Its more modest purpose was to help non-economists, if you will, better understand how to compare the economic value offish allocated

between commercial and recreational fisheries.

The Economic Value section and the Benefit-Cost Analysis section define and illustrate concepts and principles

which are fundamental to a basic understanding of benefitcost analysis. The Economic Value section, which focuses

on the foundations of economic value, is a springboard for

the Benefit-Cost Analysis section where the elements of

benefit-cost analysis, including resource costs, net national

benefits, and efficiency, are presented. In the Input-Output

Analysis section, input-output analysis, which widely serves

as a model of interactions within an economy (one of

several methodologies generally referred to as economic impact analysis), is described and critiqued within the context of fishery valuation. Important differences between

benefit-cost analysis and input-output analysis are underscored in the Comparison of Benefit-Cost Analysis (BCA)

and Input-Output Analysis (lOA) section. The glossary

in Appendix A serves as a reference for all these sections.

An example is possibly the best way to illustrate how

to compare the commercial and recreational values of fish

and to reinforce the characteristics of an efficient allocation of total allowable catch between fisheries. Accordingly,

this guide culminates in the Efficient Allocation section with

an exercise that highlights the concepts and principles

presented previously. Finally, the Summary and Conclusions section briefly summarizes and concludes the guide.

Although written at an introductory level, the reader will

be challenged by a host of unfamiliar terms that probably

cannot be assimilated casually in one sitting. Indeed, an

irony about learning a new subject-any subject-is that

introductory material always seems the hardest to grasp

simply because it is new and, at times, because preconceptions must be overcome. Consequently, a modest commitment of time and an open mind is requested. For more

information on the subject, readers might consult more

general introductions to fishery economics that were prepared by McConnell and Norton (1976), Rothschild et al.

(1977), Sutinen (1980), and Talhelm (1987).

This guide was also written with economists in mind,

however, as well as others who might want more general

information. When I sacrificed precision in favor of a

simple straight forward presentation of a concept or principle, I tried to make amends in a footnote. In addition,

more extensive treatment of technical material was relegated to two appendices. Appendix B covers the elements

of input-output analysis in considerable detail, and valuation of a fishery resource in a multimarket framework is

presented in Appendix C. Nevertheless, readers who are

interested only in acquiring a gut feeling for the issues can

stick to the main text.

Finally, although allocation between commercial and

recreational fisheries was the primary focus of this guide,

the information presented here applies equally well to

economic analyses of other types of allocation decisions

involving fisheries, including gear conflicts and conflicts

between fishing (commercial and/or recreational) and

aquaculture, dredging, waste disposal, oil extraction, shipping, and wetland destruction.

Economic Value _

Benefit-cost analysis cannot be understood without a solid

foundation in concepts of economic value. Accordingly,
_________________________ Edwards: Economics Guide to Allocation of Fish Stocks :3

or 2 or 3 or 4 or 5 or 6

Cumulative Number of Fish

A

Figure 1

Economic value is determined by the maximum

amount that consumers are willing to pay for fish. The

increments of value are traced by a demand curve.

B

2nd 3'" 4" 5"

Increment in the Number of Fish

1"

C'

.. $50 '0

>-

.. $40 0

<;'

•

•II

C

CJI $30 :§

i

E

:::J $20

E

:::E

$10

-

C

II

E

II

..

U

C

e

>-

..

0

<;' $20

••II

C

CJI $10 :§

i

E

:::J

E

:::E

this section begins by defining economic value in terms of

what seafood consumers and anglers are willing to spend

on seafood and sport-caught fish. Next, the relationship

between demand and economic value is illustrated. Subsequently, the importance of consumer surplus-the net

worth offish to consumers after expenditures are subtracted

from total economic value-is emphasized given its importance in benefit-cost analysis. This section ends with a summary of the salient points.

What Is Economic Value and How Is It Measured?

This section is devoted to defining economic value for use

in benefit-cost analysis and to briefly indicating how it is

measured. It will be shown that economic value is derived

ultimately from the tastes and preferences of consumers,

where "consumers" is defined broadly to include those who

eat fish and all anglers (regardless of whether their catch

is eaten).! In fact, the total economic value of fish is

defined and measured in terms of what someone is willing

to pay for fish-either for food or for sport-in lieu of

spending the same amount of money on other goods and

services which satisfy personal needs and wants.

A simple yet powerful proposition is that the most that

a consumer is willing to spend on fish increases with each

additional fish but at a decreasing rate (assuming, of

course, that factors which influence consumption, such as

income and preferences for seafood or recreational fishing,

remain unchanged). That is, during a specified period of

time, such as one week, each additional fish cooked for

dinner or each additional fish caught on a fishing trip

benefits the consumer, but the additional satisfaction

derived from each additional fish gets smaller and smaller.

Figure lA illustrates a hypothetical case in which, for example, the second flounder cooked for dinner is not as satisfying as the first flounder. Alternatively, if this plot were

for recreational fishing it would indicate that catching the

second flounder is not as enjoyable as catching the first fish.

'To keep things focused on the current allocation issues, other categories

of economic value related to nonconsumptive use (e.g., watching salmon

and herring runs), indirect use (e.g., watching shows about sport fishing),

preservation value (preserving fish for their own good), and bequest value

(preserving fish for use by future generations) are omitted. See Randall

(1987) for a discussion of these benefit categories.
4 NOAA Technical Report NMFS 94 _

It follows, then, that the consumer is willing to pay for the

second fish, but the maximum amount is less than that for

the first fish. Similarly, the most that the consumer is willing to pay for the third fish is positive but less than that

for the second fish, and so on. Figure lA illustrates these

properties of preferences with a curve that increases gradually from zero as the total number offish and, therdore,

total maximum willingness-to-pay increase.

The relationship depicted in Figure lA between consumption of fish and the maximum that a consumer is willing to pay for fish is simple, but it has several very important implications for economic valuation. Foremost, total

economic value is defined and measured by the maximum that a consumer is willing to pay for the good or service (in our case, fish).

Accordingly, economic value has monetary units. 2

Second, because the total value curve in Figure lA

answers questions such as, "What is the total economic

value of all three flounder?," then the demand curve in

Figure IE answers related questions such as, "What is the

economic value of the third flounder?" In other words, a

consumer's demand curve traces the most that he13he is

willing to pay for each additional fish. Therefore, the entire

area under a demand curve is equivalent to total economic

value. In this exercise, the total economic value of th,~ first

three flounder is $36.67 from Figure lA, or, equivalently,

$20 + $10 + $6.67 = $36.67 from Figure lB.

Notice that in every day language "demand" refers to

frequency of use, such as the quantity of fish consumed,

the number of consumers or anglers, and the number of

fishing trips. In economics, however, demand is a behavioral relationship which portrays how seafood consumers

and anglers alter the quantity of fish used for food and sport

in response to changes in costs and a number of other factors which affect willingness-to-pay, such as income, catch

rate, the costs of other goods and services which are

substitutes for fish, and the amount of leisure time ([or

anglers). For example, under normal circumstances an increase in income would increase a consumer's ability, and,

therefore, willingness to pay [or fish. With regard to Figure

1, an increase in the consumer's income would increase,

or "lift" maximum willingness-to-pay in Figure lA, causing the demand curve in Figure 1B to shift right. As

another example, if the cost o[ a substitute for flounder

increased-perhaps the price of cod fillets or the costs o[

fishing for, say, bluefish-the consumer's demand for

flounder would increase because compared to the substitute, flounder becomes relatively less expensive.

Perhaps the most important point implied by Figure 1

is that economic value and demand exist even when marke:s and

'Economic value can also be measured in terms of willingness-to-acceptcompensation. See, for example, Just et al. 's (1982) discussion of Hicksian surplus concepts. Also, Bockstael and Strand (1985) showed that

economic values can be measured in terms of time when a time constraint is included in the utility maximization problem.

t

>:

•

c::

0

c::

::l

..

l1.•

..

•

0

U

Tot.' con.umer

expenditure.

QU8ntity Dem8nded ----~~

Figure 2

Demand captures consumer surplus and determines total consumer expenditures.

prices are nonexistent. Markets and prices actually emerge

[rom the collective behavior of consumers and businesses

when property rights are well-defined, exclusive, and enforced. When available, prices help to reveal the maximum

that consumers are willing to pay for fish or fishing. However, prices do not, as is commonly thought, create demand

or economic value. Indeed, the opposite is true-demand,

or willingness-to-pay, is necessary for markets and prices

to emerge. Accordingly, anglers derive economic value

from resources such as fish stocks even when access to

beaches, piers, and boat launches is not rationed by

markets.

Finally, total economic value is composed of two parts

as shown in Figure 2. The rectangle that is delineated [rom

above by the price line is total consumer expenditures. For

seafood consumers, total expenditures by the consumer is

money spent on seafood in retail markets. For anglers, total

consumer expenditures are expenses for gasoline, bait,

tackle, boats, charter/party boat fishing, and other fishing

supplies that the angler uses to catch fish.

In contrast, the shaded area above the expenditures

triangle is the net economic value of fish to the consumer.

This component of total economic value is called consumer

surplus. Consumer surplus amounts to the value enjoyed by a consumer in excess of what was sacrificed to buy or catch fish.

The concept of consumer surplus often invites skepticism

in fishery managers and policy makers because it is not

tangible in the sense that expenditures or revenues involve

the exchange of money. Nevertheless, consumer surplusfollows

logically from the reasonable properties of consumer preferences

depicted in Figure 1 andfrom the corollary that economic value can
_________________________ Edwards: Economics Guide to Allocation of Fish Stocks 5

~----

$8.00 A

1!

IL

.. $3.50

!. $3.00

3 $2.50 1:

IL

oj benefit-cost analysis. Similar to profit, consumer surplus

is a benefit in excess of costs.

By way of review, economic value is defined and measured by the maximum that consumers are willing to pay

for fish or any good or service, including other natural

resources and environmental services and amenities. Total

economic value can be decomposed into expenditures, or

what consumers must give up to obtain fish, and consumer

surplus. Consumer surplus is an essential component of

the value that consumers receive from their publicly owned

fish resources.

Measuring Economic Value

A few things should be said about how to measure consumer surplus, including economic value derived from the

natural environment such as fish stocks. First, the availability of price and quantity data from markets facilitates the

estimation of demand curves and, therefore, the estimation

of economic value. Usually, aggregate demand curves are

estimated (in effect, the summation of all individual consumer demand curves), although individual demand curves

can sometimes be identified. When faced with a market

price, consumers decide, for example, how much fresh fish

to buy at a market or how often to order seafood at a

restaurant. Statistical methods such as regression analysis

can then be used to estimate demand equations based on

market data on quantities of fish sold at various prices and

on data on income, the prices ofsubstitutes, and other factors which affect willingness-to-pay. For example, the demand model for flounder that is illustrated in Figure 3A

was adapted from Cheng and Capps's (1987) report (H-t.

Cheng and O. CappsJr, Agriculture Experiment Station,

Univ. Georgia, Athens, GA, unpub!. manuscr., "Demand

analysis of fresh frozen finfish and shellfish in the United

States" 1987) on household demand for finfish and shellfish. At $3 per pound, quantity-demanded by the average

household which consumes seafood is between five and six

pounds annually, total expenditures are approximately

$17.75, consumer surplus is $12.00, and, therefore, total

economic value is $29.75. If the price increases to, say,

$3.50 because of an allocation rule which, in effect, decreases the amount of flounder that can be sold commercially (or, perhaps because of over-fishing or poor recruitment which reduces stock size), then consumer surplus for

the average household decreases by $2.77. Alternatively,

a management rule (or increase in stock size) which

ultimately increases the amount of flounder sold commercially and leads to, say, a fifty cent reduction in retail price

would increase consumer surplus by $3.14. 3 (Notice that

'Cheng and Capps (1987) actually report Engle models. Their expenditure

m,odel for flounder was converted to a demand model by dividing both

sides by price (dividing the endogenous variable, expenditures, by prices

yields quantity).

B

23456789

Rounder Fillets (lb.)

$70

$140

be measured in terms oj willingness-to-pay because people allocate

their income among things that satisfy their personal needs and wants.

As further evidence in defense of consumer surplus, consider the value that a seafood consumer would receive if

given flounder fillets for free, or the value that an angler

would receive if invited to fish for free on a charter boat.

Although there is no financial cost to these consumers, they

certainly would value these gifts. Alternatively, think of

consumer surplus as additional money a consumer would

spend on fish but which is not required at current market

prices or costs of fishing, and, instead, can be spent on

other goods and services that are valued. Similarly, a price

reduction on, say, flounder fillets or charter boat fishing

leaves consumers with "extra" money that can be spent

on more fish or other goods and services that provide

additional value.

Consumer surplus is a theoretically sound and real

category of economic value-it is not arbitrary and cannot be assumed away. Nor can its role in benefit-cost

analysis be overemphasized. Consumer surplus and, Jor now,

an analogous value category Jor producers that is somewhat related

to profit, are the two value categories covered by the "benefit" side

$25+----'-------'-----"""""Cflloo.

2 3 4

Number of Fishing Trips

Figure 3

Change in consumer surplus due to (A) a change in the price of

seafood and (B) a change in catch rate.
6 NOAA Technical Report NMFS 94 _

although the change in price was fifty cents in both cases,

the increase in consumer surplus from the price reduction

is greater than the loss of consumer surplus becaus( of the

inverse relationship between quantity-demanded and increments in maximum willing-ness-to-pay.)

In contrast to markets for seafood, legions of marine

anglers actually "produce" their own fish for sport and

food. Often their "production" involves renting charter

fishing services (including party boats and rentals from

marinas), but more frequently the goods and services

used to catch fish are purchased directly by the anglers.

Nevertheless, angler behavior reveals the economic value

derived from fish. For example, travel costs such as gasoline and the costs of bait and fishing supplies and, when

applicable, of charter fees taken together are a proxy

for the price of fishing in the absence of a market. 4- This

information plus information on income, costs of substitutes, and catch rates can be used to estimate angler

demand using what has come to be known as the travel

cost method. The logic is simple-the farther an angler

lives from a fishing site, the higher are his/her travel

costs. It follows that the number of fishing trips an angler

takes will decrease as travel costs increase, everything

else held constant. This relationship, along with estimates

of how demand changes when the catch rate increases or

decreases, can be used to estimate the value of fishing trips

and, indirectly, sport-caught fish. For example, the demand curves shown in Figure 3B arc based on Agnello's

(R.]. Agnello, paper presented at the symposium on

demand and supply of sport fishing, Charleston, SC,

"Economic valuation of marine recreational fishing,"

March 14-15 1988) travel cost demand model for flounder

fishing trips. The lower demand curve corresponds to a

catch rate of two fish per fishing trip whereas the upper

demand curve traces higher levels of willingness-to-pay

when the catch rate is three fish per fishing trip. If travel

costs remain $25 for each trip (the average in Agnello's

study), a fishery management rule which increases catch

rate from two to three fish per trip also increases the

angler's consumer surplus by $3.16. (The similarity to the

above results for seafood consumption is coincidental!)

Likewise, rules which reduce catch rates will reduce an

angler's consumer surplus.

The contingent valuation method can be used to estimate the value of fish to anglers, too, particularly when

the effects of a proposed management rule on catch rate

are uncertain. With the contingent valuation method,

researchers design experiments that help anglers to reveal

their maximum willingness-to-pay for specific increases in

(or to prevent reductions in) catch rates. Depending on how

the questions are phrased, the data can be used to estimate

'In keeping with the introductory level of this document, the discussion

is not complicated by discussing the opportunity costs of time. See Bxkstael

et al. (1987).

changes in consumer surplus directly or to estimate demand

curves for sport-caught fish. 5

Summary

The salient points of this section are

• Total economic value of fish is the maximum that consumers are willing to pay for fish.

• Economic value is not contingent on the existence of

markets and prices nor on whether a fish resource is used

for food or sport.

• Consumer surplus is the net economic value that consumers derive from fish. When consumer surplus is

overlooked, fish stocks are grossly undervalued because

consumers are ignored.

Benefit-Cost Analysis _

The above foundation in economic value is preparation for

defining what constitutes a benefit and a cost in benefitcost analysis. It should become clear in this section that,

in the context of benefit-cost analysis, a benefit is a gain

of economic value whereas a cost is a loss of economic

value. Thus, the more familiar notions of revenues and

expenditures must be interpreted very carefully when used

to help measure benefits and costs of a benefit-cost analysis.

This section first distinguishes between expenditures and

the concept of resource costs, or the foregone economic

value of a resource, such as fish, when it is used for one

purpose instead of something else. Next, net national

benefits-the focus of a benefit-cost analysis-are defined

as the difference between total economic value and resource

costs that are "spent" to make fish available to consumers

(including anglers). Net national benefits are composed of

consumer surplus and its complement, producer surplus,

or net economic value attributable to production. Also in

this section, the relationship between economic efficiency

and nct national benefits is highlighted. Finally, the section ends with a brief summary of the major points.

Opportunity and Resource Costs

Expenditures are so easily understood that the concept is

hardly worth mentioning except to compare with resource

costs (i.e., foregone economic value). Payments for goods

and services purchased in markets and taxes for public

'See McConnell's (1985) chapter on recreational demand modeling for

a discussion of, and more references to, the travel cost technique. Also,

see the books by Cummings et al. (1986) and Mitchell and Carson (1989)

for assessment of the contingent valuation method. Finally, hedonic travel

cost analysfs (Brown and Mendelsohn 1984) and, in general, household

production (Bockstael and McConnel 1981 ; McConnell and Sutinen 1982)

can be used to estimate nonmarket (or market-related) demands for sportcaught fish.
_________________________ Edwards: Economics Guide to Allocation of Fish Stocks 7

services that are not supplied by markets (such as fishery

management) are familiar to everyone. Expenditures are

simply financial, or money costs.

What appears to be confusing from controversies surrounding allocation between commercial and recreational

fisheries, however, are the implications of the symmetry

between expenditures and revenues. Mathematically, an

industry's revenues are equal to its customers' expenditures

and visa versa. Accordingly, in purely financial terms the

overall effect of an exchange of money is zero. In Figure

3A, for example, at a price of $3 per pound, the household's total expenditures of $17.75 for flounder fillets are

revenues for the retail seafood industry. Thus, the

household is $17.75 "poorer" and the retail outlet is $17.75

"richer." Similarly, at a catch rate oftwo flounder per trip,

the approximately $100 expended by the angler portrayed

in Figure 3B are revenues for companies which sell gasoline, bait, tackle, and other goods and services required

for fishing flounder. However, the overall effect of the

financial transactions between the angler and the suppliers

of fishing goods and services is zero-money has simply

been transferred, or redistributed.

Expenditures are relevant to benefit-cost analyses only

when they can be legitimately used to measure losses of

economic value when resources such as labor, fishing

vessels and other capital, and fish and other natural resources are devoted to produce one good or service instead

ofsomething else. Because opportunities to produce something else valued by consumers are foregone, the costs

involved in making the decision are usually called opportunity costs. Thus, fish, such as flounder, which are sold

to consumers in seafood markets are also valued by anglers,

although the anglers' opportunities to catch and possibly

eat the same fish are precluded. The reverse is also true.

Although expenditures could be construed as a purely

financial opportunity cost incurred by consumers and

businesses (the same dollar cannot be spent on more than

one commodity or resource), the focus here remains on the

lost economic value of resources. In fact, because of the

scope for ambiguity, it makes more sense to refer to

resource costs when discussing opportunity costs in the

context of benefit-cost analysis. Whereas expenditures

imply spending money, resource costs imply "spending"

resources such as labor, capital, and fish stocks.

Although the concepts are distinct, the differences between expenditures and the opportunity costs of resource

use are blurred when the latter are measured. When markets for productive resources are competitive, market prices

(including wages) reveal, or give a good indication of, the

economic value to consumers of the goods or services that

would otherwise have been produced by the same resources. Also, when a change in the use of a resource is

too small to effect a price change, total expenditures reveal,

or measure, resource costs. That is, when these conditions

involving the prices of resources and resource use are

satisfied, payments by businesses and anglers to hire, buy,

and rent resources to make fish available for consumption

are mathematically equal to the opportunity costs ofthe same

resources.

Bear in mind, however, that expenditures do not always conveniently measure resource costs-that expenditures and resource costs

are conceptually distinct. For example, taxes that redistribute

wealth to the poor do not "spend" productive resourcesthey are transfer payments of money. Also, prices and

expenditures may not accurately measure resource costs

when markets are not structured competitively or when the

amount of a resource being used affects its price. However,

these (and other) exceptions to when expenditures can be

used to measure resource costs are technical matters that

are beyond the scope ofthis guide. See Gittinger (1982) for

a more detailed discussion and comparison of expenditures

and the opportunity costs of resource use.

Net National Benefits

Having covered economic value and resource costs, it is

relatively straightforward to define net national benefits.

In benefit-cost analysis, the net national benefits from using fish

are maximum willingness-to-pay (i.e., total economic value) minus

all opportunity costs ofusing resources to makefish available to consumers (including anglers). Net national benefits are illustrated

on Figure 4A with the aid of a standard depiction of demand and supply as presented in other pedagogical

writings (e.g., Hushak 1987). Assuming that this supply

curve traces the incremental resource costs of providing

additional fish to consumers (analogous to how a demand

curve traces the incremental economic value of additional

fish to consumers), then the area beneath the supply curve is total

resource costs, and the area between demand and supply is net national

benefits.

Actually, the phrase 'net national benefits' is troublesome because it is both misleading and ambiguous. It is

misleading because the effect of a management rule which

allocates a fish stock between commercial and recreational

fisheries generally will be felt regionally-not nationallywhere the commercial fishermen, anglers, and related constituencies (including seafood consumers) reside. The

phrase is also ambiguous because the word, 'benefits,'

could refer to purely financial benefits, such as revenues

or, from a government's perspective, taxes, in addition to

economic value as defined above. Thus, the area between

the demand and supply curves in Figure 4A is better called

net economic value. Nevertheless, given its widespread

use by economists and others when referring to the

economic value of fish stocks (including the Magnuson

Act), I shall continue to use the phrase "net national

benefits," when speaking of net economic value.

Notice in Figure 4B that the cost line actually divides

net national benefits into two parts. The top part is consumer surplus as was already discussed in the Economic
8 NOAA Technical Report NMFS 94 _

B

associated with commercial fishing because resource costs

are not subtracted. (And, obviously, revenues do not subsume consumer surplus from seafood consumption.)

In Figure 5, pie diagrams are used to display the

elements of net national benefits. In the seafood sector, net

national benefits comprise consumer surplus, producer

surplus in retail markets, and producer surplus from other

suppliers in the marketing chain from commercial fishermen to retailers, because these industries make fish

available to consumers. In the sport fishing sector, there

is consumer surplus enjoyed by anglers plus producer

surplus from the charter fishing industry. The economic

values from the respective user groups are purposely drawn

10 he equal in order to focus on the important concepts

and principles and to avoid giving the impression that total

net economic value from one use is inherently greater than

the other use.

(01'

-----~1 .N« economic ~Iue)

$

$

Unit

eo.t

&

Quantity of Fish

Figure 4

Net national benefits (i.e., net economic value) comprised consumer surplus and producer surplus.

Value section. The bottom part of the area encompassing

net national benefits is producer surplus. In practice, producer surplus can be measured by subtracting the resource

costs of providing fish to consumers from total revenues.

Producer surplus is not, however, the profit an accountant might measure (i.e., revenues minus expenditures)

even when expenditures on resources measure their opportunity costs in other uses. That is, the value of the entrepreneurs' assets, including labor, capital, and land, must

also be deducted from revenues when estimating producer

surplus.

It may be apparent from this discussion of producer

surplus that revenues are not a benefit in the strict sense

used in benefit-cost analysis. Although revenue data can

be used to help estimate the economic value which is

associated with production, all resource costs must be subtracted from revenue in order to estimate producer surplus

(the second component of net national benefits). Accordingly, the so-called dockside' 'value" of fish in a landings

market actually overestimates the net economic value

Economic Efficiency

In the context offishery management, economic efficiency

relates to the total size of net national benefits from the

collective use of a fish resource. In Figure 6, the center pie

is supposed to illustrate the combined total net national

benefits displayed by Figure 5 for the seafood and sport

fishing sectors of the (usually) regional economy. A

management rule which increases total net national benefits

is said to increase the efficiency of uses of a fish resource-it

increases the size of the net economic value pie that commercial fishermen, anglers, fish wholesalers and retailers,

the charter fishing industry, and seafood consumers share

from a fish resource. Similarly, a policy which maximizes

net national benefits gleans the most net economic value

from a fish resource as is possible given constraints which

are outside the control of management. In contrast, a loss

in economic efficiency implies a loss of net national benefits,

or net economic value.

Notice that losses in economic surplus experienced by

one or more groups would be consistent with increased efficiency provided that total net national benefits increase.

In other words, the compensation test jarjudging whether efficiency

is increased is whether {{winners" oj economic value could compensate {{losers" and still come out ahead. That is why the

{{ slices" of the right-most pie in Figure 6 are not shown.

In addition, one or more groups could experience a gain

in consumer surplus and/or producer surplus even when

use of a fish resource on the whole becomes less efficient.

Thus, allocation can affect the relative sizes of the shares

of net national benefits as well as the pie's total size.

Before exploring the allocation issue further, it is necessary to report on the increasingly inappropriate use of

input-output analysis when net national benefits are estimated. Allocation of a fish stock between commercial and

recreational fisheries is revisited in the Efficient Allocation

section after input-output analysis is described in the Input-
_________________________ Edwards: Economics Guide to Allocation of Fish Stocks 9

Components of Net National Benefits (I.e. Net Economic Value)

Produc.r aurplua

(harv.atlng, whol...I., retail)

Seafood Sector

Producer aurplua

(charter nahlng)

Sport Fishing Sector

Figure 5

Components of net national benefits (i.e., net

economic value) in the seafood and sport

fishing sectors.

Loss in

Efficiency

Efficiency

I=I ISports::-I

e--

V~tplu.

Present Conditions Gain In

Efficiency

Figure 6

Economic efficiency increases (decreases) when net

national benefits (i.e., net economic value) increase

(decrease).

Output Analysis section and contrasted to benefit-cost

analysis in the Comparison of BCA and lOA section.

Summary

In conclusion, several important concepts and principles

are worth repeating:

• In the context of benefit-cost analysis, "benefits" are

economic value as defined in the Economic Value section in terms of consumers' maximum willingness-topay for fish, and "costs" are the opportunity costs of

resources used to make fish available to consumers. In

this context, revenues are not benefits and expenditures

are not costs (or benefits), although these quantities can

be used to help measure producer surplus and resource

costs when certain conditions are satisfied.

• In benefit-cost analysis, net national benefits are total

economic value minus total resource costs. Net national

benefits, which are comprised of consumer surplus and

producer surplus, are synonymous with net economic

value.

• Any action which increases net national benefits from

the use of fish resources is said to increase efficiency,

even if consumer surplus or producer surplus for some

groups decline. Likewise, when net national benefits

decline, efficiency goes down, and Americans suffer a

loss of economic value from the use of their publicly

owned fish stocks.

As emphasized in this section, data on expenditures and

revenues must be interpreted cautiously before they can

be used to measure economic value. This caution extends
10 NOAA Technical Report NMFS 94 _

Table 1

Transactions flow table ($ millions).

Commercial

fishing

Purchasing sectors

(i.e., intermediate demand)

Recreational

fishing

All other

industries

Final demand

expenditures

Households Exports Output

Producing sectors

Commercial fishing n 0 7 0 3

Recreational fishing 0 2 1 4 3

i All other industries 2 2 -1-3000 38000 18996

I Primary inputs

!

Value-added 7 3 49992 0

Imports 1 J 7UOO ](1000 - 17004

LTotal inputs 10 10 100000 48004 1998

10

10

100000

100020

to the use of expenditures and revenues In input-output

analysis, the subject of the next section.

Input-Output Analysis _

Benefit-cost analysis is used to determine whether a fishery

regulation would increase or decrease efficiency. Although

a benefit-cost analysis is not necessarily limited to the entire Nation, this scope is appropriate when the Federal

Government affects use of a natural resource that is, in fact,

owned by all citizens. Nevertheless, benefit-cost analysis

is flexible enough to be limited to a particular region of

the country, or, if national in scope, it could be partitioned

to isolate effects on particular regions or groups. As emphasized above, however, most of the effects of a fishery

management plan on consumers and industries are probably felt regionally. Therefore, limitations on scope are not

necessary In many cases.

In contrast, input-output analysis (and related methodologies generally referred to as economic impact analysis)

is used to determine how the same regulation would change

regional income and other economic "activities," particularly revenues, expenditures, and employment. For

example, input-output analysis is often used by manufacturers and local and state governments to determine how

fishery regulations might affect their share of markets and

revenues, including taxes. Despite the disparate purposes,

and despite the ambiguous relationship between changes

in these economic activities and changes in consumer and

producer surplus, input-output analysis is often improperly

disguised as a surrogate for benefit-cost analysis.

In order to explain why input-output analysis cannot

assess changes in net economic value, a basic understanding of the methodology is required. Accordingly, this section begins with the foundations of input-output analysis,

including a simple exercise to illustrate several points.

Subsequently, several common misconceptions and pitfalls

which characterize improper applications of input-output

analysis are highlighted, including the scope for exaggerating the multiplier effects of new expenditures by consumers. Along the way, reasons for why constituencies

might understandably promote input-output analysis for

their own benefit are pointed out. Keep in mind, however,

that legitimate uses of input-output analysis are not being

challenged. Rather, this section repudiates using input-output

analysis as a surrogate for benefit-cost analysis.

Elements of Input-Output Analysis

Input-output analysis begins with a parsimonious accounting of financial links among industries, households, export

markets, and, often, the public sector. The links are measured in terms of expenditures on the inputs (both

resources and manufactured products that are intermediate

to the production of final products purchased by consumers) which are used to manufacture goods and services;

revenues from the sale of products (i.e., output) and from

taxes; and, income, or payments for labor and ownership

of capital and privately-owned natural resources such

as land. In practice, industries within a "region" (could

be a town, county, state, or nation), such as seafood processing or tackle manufacturing, are combined into somewhat homogeneous sectors having similar input requirements. For example, one national input-output model

combines the thousands of industries in the United States

into 496 sectors. In more focused, fisheries applications,

however, the number ofsectors are reduced further in order

to facilitate analyses of the effects of a public policy on

fisheries sectors. For example, in Hushak's input-output

analysis of Ohio's fisheries in Lake Erie (Hushak 1987;

Hushak et al. 1984), there are only 43 sectors, including

commercial fishing, charter fishing, and marina and boat

sales.
________________________ Edwards: Economics Guide to Allocation of Fish Stocks 11

Although greatly simplified, the transactions flow table

shown in Table 1 is patterned after Hushak et al. 's (1984)

input-output study. In Table 1, all industries belong to one

of only three sectors: 1) the commercial fishing sector; 2)

the recreational fishing sector; or 3) the considerably larger

combination of all "other" industries. Whereas the commercial fishing sector is restricted to only harvesting, the

recreational fishing sector includes a wide variety of products and services such as charter boat fishing, boat sales,

and sales oftackle, bait, and boat rentals by marinas. Other

industries with ties to commercial and recreational fishing,

such as boat building, food processing, finance and insurance, lodging, retail food sales, and restaurant trade,

are lumped in the "other" sector with the rest of the

regional economy.

Transaction flow tables reflect that industries both

receive revenues for the output that they produce and incur expenditures when they purchase inputs used to produce output. In Table 1, the "producing sectors" supply

both processed, or intermediate, inputs (e.g., whole fish;

fiberglass for fishing poles) and final products (e.g., fish

dinners at a restaurant or fishing trips) to industries in the

"purchasing sectors," to regional consumers, and to consumers and industries in other regions. The latter groups

are referred to collectively as final demand expenditures

(hereafter, final expenditures will be used). For example,

in this exercise nothing from the recreational fishing sector is sold to the commercial sector; $2 million of output

from recreational fishing is sold to industries within the

same, recreational fishing sector; $1 million of output is

sold to "other" industries; $4 million of output is sold

directly to regional consumers; and $3 million of output

is exported to industries and consumers outside the region

for a total output of$10 million. (In practice, business investment and the public sector could be added to the final

expenditures block, but the additional detail would unnecessarily detract from this introduction.)

Likewise, the two primary inputs sectors listed in Table

1 supply the region's industries and consumers with imports from other regions and with labor, capital, and

privately owned natural resources such as land and caughtfish from within the region. Labor, capital, and privately

owned natural resources are subsumed in the value-added

sector, where the phrase "value-added" refers to the increased value of intermediate products after productive

resources such as labor, capital, and land are applied to

convert a product into a form which is closer to that finally

sold to consumers. For measurement purposes, the valueadded sector includes wages, salaries, capital depreciation,

and rent (Richardson 1972). For example, in this exercise,

the value-added sector supplies $7 million oflabor, capital,

and privately-owned natural resources to the commercial

fishing sector, $3 million ofinputs to the recreational fishing

sector, and nearly $50 billion of inputs to the "other"

industries. Similarly, the region imports the following

amounts of goods and services: $1 million by the commercial fishing sector; $3 million by the recreational sector;

$7 billion by the "other" sector; and $10 billion by consumers. The negative entry in the import/export cell is

simply the sum of imports by regional consumers and the

three purchasing sectors (an import is considered to be a

"negative" export).

In contrast, the distribution of a sector's expenditures

on inputs appears down its column. For example, the commercial fishing sector's purchases oflabor, vessels, repairs,

financing, insurance, and so on are distributed as $2 million

from the "other" sector, $7 million of value-added inputs,

and $1 million of imports for total expenditures of $10

million; nothing is purchased from the commercial or

recreational fisheries in this exercise. In contrast, regional

consumers purchase products and services amounting to

$4 million from the recreational fishing sector, $38 billion

from the "other" sector (including seafood from retail

markets and restaurants), and $10 billion from industries

outside the region. 6 Expenditures by anglers who live outside the region on fishing trips and retail goods and services such as lodging, souvenirs, and meals are distributed

between the recreational fishing and "other" sectors under

the exports column.

From the perspective of a public servant, a primary

reason for having information organized in a transactions

flow table is to learn how a fishery regulation might change

revenues (i. e. , production), income, and employment in

the regional economy through its effects on final expenditures on seafood and recreational fishing. As in benefitcost analysis, however, the actual execution of an inputoutput analysis can be quite complicated. Consequently,

only selected results are reported here. See Appendix B for

more details.

The results of an input-output analysis are determined

by up to three levels of impacts, or effects: 1) direct effects; 2) indirect effects; and 3) induced effects. The initial impacts of an increase in final expenditures for a sector's output are called direct effects and are measured by

technical coefficients. Technical coefficients are calculated

by dividing a sector's various direct input requirements

by its total output. For example, from Table 1, each dollar

increase in final expenditures for goods and services produced by the recreational fishing sector requires $0.20 of

inputs from its own sector (i.e., $2 million divided by $10

million), $0.20 of inputs from "other" industries, $0.30

of labor and other value-added inputs, and $0.30 of imports. Likewise, the inputs required to satisfy each dollar

increase in final expenditures for output from the commercial fishing sector (only exports in this exercise) are $0.20

6Notice that a sector's output (i.e., revenue) and inputs (i.e., expenditures)

are equal, and that total value-added is equal to total final demand

($50.002 billion). The latter condition assures that final expenditures (i.e.,

gross regional product) do not exceed total regional income.
12 NOAA Technical Report NMFS 94 _

-------------_.__._-----------------------,

---------_._--_._-_.._--------

Table 2

Economic impacts and multipliers corresponding to Table 1. ---------------

1. 75

0.49992

0.88

1.75

0.00001

0.000018

1.75

5.74

0.49992

2.87

5.74

0.00001

0.000057

5.74

"Other" industries

Sector

4.39

D.3

1.94

6.48

0.00002

U.000056

2.82

1.69

D.3

0.59

1.98

0.00002

0.000029

1.47

Recreational fishing

_._---_.__.._-----------------

Commercial fishing

-_.__.. _._.--_.__._---

Type I (direct + indirect)

l.35

0.7

0.88

1.25

0.00003

0.000034

1.12

Type II (Type I + induced)

5.33

D.7

2.86

4.09

U.00003

1I.000073

3.66

Output multiplier

Direct income effect

Total income effect (Keynesian multiplier)

Income multiplier (ratio multiplier)

Direct employment effect

Total employment effect (Keynesian multiplier)

Employment multiplier (ratio multiplier)

Output multiplier

Direct income effect

Total income effect (Keynesian multiplier)

Income multiplier (ratio multiplier)

Direct employment effect

Total employment effect (Keynesian multiplier)

Employment multiplier (ratio multiplier)

1-------

i

I

I Impact_c_a_te_g_o_ry _

I

--------------_._- ._--- ---_._-_._-------------------'

from "other" industries, $0.70 oflabor and other valueadded inputs, and $0.10 of imports.

The initial, direct effects of an increase in final expenditures on a region's output also give rise to indirect effects

and induced effects as new-found revenues and income,

respectively, are spent again and again on inputs and final

goods and services. For example, in order to supply the

recreational fishing secto!: with inputs so that it can satisfy

the increased demand it faces for recreational goods and

services, industries in the "other" sector must increase

their own use of inputs from each sector in the region (see

the "other" sector's column for specific input requirements). Similarly, increased use of labor, capital, and

privately-owned natural resources presumably generates

additional income for regional consumers which, in turn,

induces additional expenditures on all final goods and services produced in the region. In these ways, the regional

industries and consumers "recycle," if you will, the money

supply. At each step in the process, though, money "leaks"

from the regional economy owing in large part to imports.

Once all the spending and respending are computed, the

overall effects of all rounds ofspending on output from the

regional economy can be expressed by indices called output multipliers. Mathematically, the usual output multiplier is the overall, or total effect of a change in final

expenditures on regional production divided by the initial,

direct effect, where the total effect is the sum of the direct,

indirect, and, sometimes, induced effects. In other words,

the output multiplier is average production in the economy

per dollar of direct effect. There are at least two general

kinds of output multipliers. For a type-I multiplier, the

total effect of an increase in final expenditures on regional

production includes only the direct and indirect effects. In

contrast, a type-II multiplier also includes induced effects

generated by regional consumers.

Table 2 lists the output multipliers calculated from the

transactions flow table reported in Table 1. For example,

the type-I output multiplier for recreational fishing is 1.69,

meaning that, on average, each $1 increase in final expenditures for output produced by the recreational fishing sector requires $1.69 of inputs from all producing sectors in

the region (including recreational fishing) once indirect effects are taken into account. The type-I output multiplier

of 1.35 for commercial fishing reveals that each $1 increase

in final expenditures for output from the commercial fishing

sector requires a total of $1.35 in output from the region.

Common Misconceptions and Pitfalls

The elements of input-output analysis were presented in

order to help identify several common misconceptions and

pitfalls which characterize the controversy over fishery

allocations between commercial and recreational fisheries.

Several problems surround the interpretation and use of

multipliers.

Output multipliers are tremendously important to industries that expect to benefit or lose financially from a

fishery management regulation, particularly an allocation

rule. Their interests center, quite understandably, on what

affects the profit and market share of their industry's

revenues pie, but certainly not on the overall effect of

management on net national benefits. From a broader

perspective, however, if a fishery regulation results in, say,

anglers spending less money on recreational fishing, the
________________________ Edwards: Economics Guide to Allocation of Fish Stocks 13

anglers will most likely spend more money on other forms

of leisure. Likewise, even if a proposed regulation is

expected to reduce industrial output within the region

being studied, financial gains from increased exports by

other regions will usually offset the loss. Overall, then, when

a jishery sector or a region loses money, other sectors in the region

or, possibly, in other regions will usually gain money. Thus, when

marine pollution off the northeast coast ofthe United States

caused tourism and seafood consumption to decline in

1988, consumers spent their money at other resorts. As

introduced in the Benefit-Cost Analysis section, purely jinancial

exchanges are transfer payments, the overall effect oj which is

zero.

Consequently, it is not surprising when regional economists remark that output (i.e., revenue) multipliers "are

of little economic significance" from the public sector's

perspective because they do not have a discernable relationship to net economic values (Archer 1977, p. 517).

Similarly, Scott (1984, p. 253) concluded that in general

" ... there is no particular relationship (even in algebraic

sign) between changes in net societal [i.e., national] benefits ... and changes in regional incomes." That is, although

revenues subsume producer surplus, it is not possible to state

a pn'ori how producer surplus changes when regional output changes.

Furthermore, consumer surplus is completely disregarded in inputoutput analysis.

An emphasis on expenditures, revenues, and output

multipliers in input-output analysis also leads to at least

two curious conclusions when the logic is extended to

similar circumstances. First, it behooves owners of commercial fishing operations, or any business, for that matter, including tackle manufacturers and boat builders, to

minimize financial costs and, thereby, increase profitability. Consequently, to compare the expenditures of commercial fishermen and anglers is improper. In jact, net

national benefits are actually enhanced when businesses, including

commercial jishing operations, minimize use oj productive inputs

because the remaining inputs can be used to produce other goods and

serVIces.

Second, it follows from the illogic surrounding the purely

financial indices that injury to fish stocks caused by sewage

pollution, toxic waste disposal, or disasters such as oil or

chemical spills (recall the Exxon-Valdez spill) are a regional

benefit because they generate regional expenditures on inputs used for clean-up and habitat restoration. Clearly,

though, pollution will only diminish the value that consumers and producers derive from fish. To make matters

worse, resource costs will increase because inputs which

are devoted to monitoring, assessing, and mitigating

damages are removed from the production of other goods

and services valued by consumers. These logical extensions

of popular input-output arguments should raise very

serious doubts about the use of output multipliers and

whether expenditures and revenues themselves reflect

economic value.

In contrast to output multipliers, changes in income (i.e.,

payments to value-added inputs such as labor and owners

of capital and land) can, in principle, be used to estimate

changes in producer surplus (Harris and Norton 1978;

Hushak 1987). Also, changes in employment brought

about by a fishery management rule are potentially estimable from input-output analysis. Nevertheless, several

misconceptions and pitfalls surrounding the use of even income and employment multipliers need to be highlighted

here.

Multiplier effects on regional income and employment

are determined from the direct and total income and

employment effects of a change in final expenditures (Table

2; see Appendix B for details). The direct income effect of

a change in final expenditures is the average income in a

sector per dollar of the sector's output. The same is true

for employment. (Hereafter, the discussion focuses on income, although the remarks apply equally well to employment.) For example, in the transactions flow table, valueadded inputs employed by the recreational fishing sector

earn, on average in the economy, nearly $0.30 for each

dollar of the recreational fishing sector's output (i.e., $3

million/$10 million). Respending ofrevenues by the recreational fishing industries ultimately leads to a total income

effect of nearly $0.59 of income per dollar of output by the

industrial sector. Finally, the total income effect increases

to $1.94 per dollar of output when respending of additional

income earned by regional consumers is taken into account.

The analogous income effects on the commercial side are

0.70, 0.88, and 2.86, respectively (Table 2).

Typically, the various income effects are used to generate

the more familiar, albeit increasingly abused, ratio multiplier. As its name might imply, a ratio multiplier for income is generated by dividing the total income effect by

the initial direct income effect. (For future reference, it is

important to notice that income is divided by income.) For

example, the recreational fishing sector's type-I ratio

multiplier for income is 1.98, (i.e., 0.59/0.30). That is, on

average in the present economy, once respending by the

industrial sectors is taken into account, the total income

effect of an increase in final expenditures for goods and

services produced by the recreational fishing sector is nearly

two times greater than the initial direct effect of final expenditures on income. On the commercial side, the type-I

ratio multiplier for income is less in this exercise-1.25

(i.e., 0.88/0.70)-only because the direct income effect is

proportionally greater (nearly 80 % of the total income effeet) than in the recreational fishing sector (51 % of the total

income effect). The type-II multipliers for both sectors are

greater than their type-I counterparts because of the additional induced effects of respending by regional consumers.

(The type-I and type-II ratio multipliers for employment

are calculated analogously.)

Because ojthe way that they are calculated, ratio multipliers actually do not provide much useful information beyond an indication
14 NOAA Technical Report NMFS 94 _

ojthe self-sufficiency ojthe economy being studied. For exc.mple,

without imports and other "leaks" from the economy such

as savings, money would continually recycle within a

regional economy, resulting in ir!finite total effect~ and,

therefore, infinite type-II multipliers. 7 Accordingly, the

larger the regional economy, the larger a multiplier tends

to be when imports decrease in proportion to total regional

production. Also, in a regional economy with negligible

leaks, the magnitude of type-I multipliers tends toward infinity as the proportion of value-added inputs to total outputs decreases (i.e., as the direct income effect decreases).

Because ofthe influence ofthe size ofan economy on the size ojratio

multipliers, extreme caution is advised when comparing multipliers

between regions and from different studies. Unless the context is

specified, multipliers are meaningless (Archer 1984).

Extreme caution is also advised when ratio multipliers

are used to predict how a fishery management rule will change

regional income. Although seemingly appropriate, one cannot

predict the total impact on regional income of a change in final

~xpenditures by multiplying a ratio multiplier by the change. The

approach is mathematically illogical because, unlike that

for output multipliers, the denominator of a ratio multiplier

for income is income, not expenditures; hence, the units of

the denominator do not "cancel out" when multiplied by

final expenditures. Instead, the total income effect-the

numerator of a ratio multiplier, or what Archer (1977) calls

a Keynesian multiplier-should be multiplied by the expected change in final expenditures to determine changes

in income. (The same rule applies to employment effects.)

The results from Table 2 help to emphasize when ratio

multipliers are inappropriately used to predict economic

impacts on income. In particular, notice that the total

income and employment effects-the Keynesian multipliers-can be much smaller than their ratio counterparts.

Consequently. total impacts of a change in final expenditures on regional income and employment tend to be exaggerated when ratio multipliers are incorrectly used as

just described. Perhaps more importantly, though, improper use of ratio multipliers can lead to incorrect inferences about how allocation might affect income or enployment in a region. For example, the type-I and type-II ratio

multipliers for income are greater for recreational fishing

than for commercial fishing in this exercise. However, the

relative sizes of the total income effects-again, the Keynesian multipliers-are actually greater in the commercial

fishing sector (Table 2). Consequently, in this exercise, a

$1 increase in final expenditures for output from the commercial fishing sector might actually have a greater impact

on regional income than an equal increase in final e:xpenditures for recreational fishing despite the relative size of

the ratio multipliers. As noted above, this reversal arises

because the direct income effects in the commercial fishing

'The infinite multiplier arises because of constant returns to scale and

fixed input ratios.

sector are proportionally greater with respect to indirect

and induced effects than in the recreational fishing sector.

The overall impact of a change in final expenditures on income

vr employment in an economy depends on both the size ojthe Keynesian multiplier and on the expected change in final expenditures

because these components are multiplied to calculate the overall

impact. In fact, information on expected changes in final

expenditures actually requires an estimate of consumer

demands for fish as illustrated in Figure 3. For example,

even if a management rule is expected to increase catch

rate among anglers, the rule will not necessarily increase

regional income unless the higher catch-rate increases the

demand for fishing trips-regardless of the size of the

Keynesian multiplier.

Difficult problems remain, however, even when Keynesian multipliers are used to project changes in income and

employment. Only two problems are mentioned here.

First, overlooking likely adjustments in input use in other

sectors of the economy could deceive fishery managers and

policy makers. For example, projections based on a region's

current industrial structure and employment of value-added

inputs tacitly assume that there is sufficient productive

capacity and inputs to satisfy an increase in final expenditures by increasing output. When employment oflabor.

capital, and natural resources is high or when unemployed

resources lack the necessary skills and characteristics to

meet the increased demand, an increase in production in

one sector could easily be at the expense of another sector's production (Haveman and Krutilla 1968).8 Also, imports from other regions are viewed negatively by the

region enclosed by a study (sometimes narrowly defined

as a community); yet regions which supply the imports certainly consider their exports to be beneficial. Taken together,

it is not clear, a priori, whether regional income-including producer surplus-or employment will increase or decrease even when

Keynesian multipliers are used, unl,~ss the levels of these activities

with management are compared to levels without management. 9

Summary

Input-output analysis was originally developed to describe

the links among industries (in terms of expenditures and

reven ues), final expenditures (e. g., consumer expenditures

"Impacts are generally based upon the average relationships for the exi&tin!( economy, although marginal changes are much preferred.

9Gross National (Regional) Product and Gross National (Regional) Income should not be confused with total impacts determined from an inputoutput analysis. In general, only total final "demand" measures Gross

National (Regional) Product, and only income for value-added inputs

measures Gross National (Regional) rncome (Miller and Blair 1985).

In this exercise, gross regional production and gross regional income are

both $50,002. Total regional output-$100,020-is considerably greater

because it "double-counts" what labor and other value-added inputs contriLJute to the final product. Consequently, regional transaction tables

and associated indirect, induced, and total effects must be interpreted

carefully when determining contributions to the economy.
_________________________ Edwards: Economics Guide to Allocation of Fish Stocks 15

and exports to markets outside the region), and primary

inputs, such as labor, in a regional economy. The methodology is important in projecting how a change in expenditures by the final demand sector affects the distribution

of income, employment, and revenues among a region's

industrial sectors. The ability to project financial effects

on industries is important to constituencies and communities which would benefit or be harmed by a fishery allocation. Nevertheless, public officials may favor looking at the

overall effects of a fishery policy on all constituencies, even

when the officials' purview is restricted to a region. Accordingly, the following remarks should be kept in mind

whenever input-output analysis is incorrectly casted as

benefit-cost analysis:

• Output, or revenue effects-including output multipliers-generated in an input-output analysis are irrelevant when discussing net economic value.

• Ratio multipliers are deceptive and should be ignored

when one wants to project how an allocation rule will

affect income and employment. Instead, Keynesian

multipliers, or total income and employment effects,

should be used in conjunction with expected changes

in final expenditures to determine overall economic

impacts.

• In isolation, even Keynesian multipliers cannot reveal

how a fishery management regulation will affect income

and employment. Notwithstanding legitimate concerns

about compensatory adjustments in other sectors and

regions, both Keynesian multipliers and the expected

changed in consumer expenditures and purchases in

export markets are required to estimate the overall,

net impact of a regulation on regional income and

employment.

• Input-output analyses of fishery management policies

tend to be restricted to the regional level and, therefore,

ignore compensatory changes in income and employment in other regions. This limitation could lead to

disagreements between regional and national perspectives on fishery management depending on the size of

the region. Often, however, the impacts of an allocation rule are concentrated within the management agency's regional purview.

• Because of the link between producer surplus and income earned by labor and owners of capital and natural

resources, input-output analysis could, conceivably, be

used to estimate changes in producer surplus in sectors

indirectly related to fisheries; however, this extension of

input-output analysis is in a developmental stage. Furthermore, even a satisfactory extension of input-output

analysis would still ignore consumer surplus. For this,

and the many other reasons described in section IV,

input-output analysis (and other forms of economic impact analysis) cannot be a surrogate for benefit-cost

analysis.

Comparison of Benefit-Cost Analysis (BCA)

and Input-Output Analysis (lOA) _

In this section, benefit-cost analysis and input-output

analysis are briefly contrasted, side-by-side, using Table 3

Table .'3

Comparison of input-output analysis and benefit-cost analysis.

Category

A. Focus

B. Boundary

C. Determines changes in net economic

value?

1) consumer surplus?

2) producer surplus?

3) efficiency?

D. Emphasis on net effects of regulation?

E. Weight given to indirect and induced

effects

F. Weight given to distribution of

revenues and expenditures

G. Distribution of effects over time?

Economic impact analysis

economic activity (revenues, expenditures, taxes, income, employment)

all industries in a regional economy;

consumers are disregarded except for

their expenditures

no

potentially

no

yes, but usually not analyses

developed by constituencies

generally very important despite compensations in other regions

a principle application by constituencies

no

Benefit-cost analysis

economic value (consumer and producer surpluses) and resource costs

generally, consumers and only industries which make fish available to

consumers

yes

yes

yes

yes

considered negligible owing to adjustments elsewhere in economy

none

yes L-- _
16 NOAA Technical Report NMFS 94 _

IOThis inclusive description abstracts from the variety of anglers, some

of whom catch but do not land and consume fish. Overall, however,

it fits into a general type of household production framework. See McConnell and Sutinen (1982) for an application to fisheries.

Figure 7

Benefit-cost analysis concentrates on changes in net national

benefits (i.e., net economic value) associated with consumers and

with industries which make fish available to consumers.

Direct Effect.

Con.umer .urplu.

Ior,ngl."

o Produc.r .urplu.

In m,rlr." for

ch,rter n.hlng

Producer .urplu,

In the h,rv"tlng

leCtor

o Con.umer .urplu.

In """m,rlr.t.

{frocery '/orn,

safood m,tt,,,,

re./,ur,n/',,/e.}

insurance jo Producer .urplu.

In ret,1I m,rlr."

(frac.ry ./oreS,

...food m,rke/.,

re./,uTln/',e/e.)

o Producer .urplu.

In "hol.ul.

marlr."

Producer .urplu,

In m,rlr.t. which

dl.trlbut.,proc,",

,nd p,clllg. n.h

.'induced" effects. Finally, consumer surplus enjoyed by

seafood consumers and anglers, either from inside or outside the region, is disregarded in input-output analysis. In

input-output analysis, consumers are important only for

their expenditures.

In contrast, "direct" effects in benefit-cost analysis generally

are confined to changes in net economic value in markets which trade

the regulatedfish resource (Fig. 7). In the seafood sector, direct

effects include both consumer surplus and producer surplus

for commercial fishing companies and for other industries

which distribute, process, and retail fish. On the recreation side, the analogous vertical integration of industries

which catch and handle fish is condensed because the angler

is, in effect, a sole "producer" except when charter services are hired to gain access to fish stocks. Otherwise,

anglers combine bait, tackle, fishing poles, ice, and, in

some cases, private or rental boats to catch, process, and

consume fish. 10

Also in benefit-cost analysis, "indirect" effects concern

markets for all inputs other than fish which are employed

by the fishing sectors. The long list includes labor, boats,

Seafood Sector

as a guide. The comparison concerns how the methods are generally

understood and applied (as opposed to a theoretical ideal). Most

differences involve what is being measured and what industries are being included.

Recall from the Input-Output Analysis section that

input-output analysis describes the distribution of production and input requirements for all industries within a regional

economy, although the industries are aggregated into a

manageable number of somewhat homogeneous sectors

based upon similarities among input requirements. The

scope of benefit-cost analysis tends to be regional, but the

analysis is generally restricted to only those industries which

harvest, distribute, process, and retail the resource being regulatedyieldfrom afish stock. Possible effects in related markets for

inputs used to harvest and make fish available to consumers

generally arc assumed to be negligible or short-lived in

benefit-cost analysis owing to input substitution in other

markets. That is, after initial impacts of a regulation,

primary inputs such as labor, capital, and natural resources

(e. g., iron and aluminum used to make engines and fishing

gear) are assumed to be hired or bought by other industries

at equivalent prices.

Also recall from above that benefit-cost analysis and

input-output analysis focus on different types of information. Benefit-cost analysis focuses on economic value and

resource costs and on whether a regulation will increase

economic efficiency from use of publicly owned fish s~ocks.

The strong emphasis placed on measuring changes in net national

benefits-consumer surplus and producer swplus-is a ha'lmark

of benefit-cost ana(vsis and a significant difference between it and

input-output analysis which inherently ignores changes in consumer

surplus and does not appear to be developed sufficiently to measure

regional changes in producer surplus. In contrast, the garden

variety of input-output analyses which are promoted by

constituencies tend to focus on the distribution of financial

gains and losses for their respective sectors instead of on

estimating net changes in income or employment.

What constitutes direct, indirect, and induced effects

needs to be reviewed, too, because of differences in meanings and because of implications for what is and is not

measured. In input-output analysis, the "direct" effects

of a regulation which influences final demand expenditures

are spread across primary and intermediate inputsfrom the

entire economy, including labor, capital, and privately owned

natural resources such as land and caught-fish. Also, often

when recreational fishing is being evaluated, consumption

of goods and services which are unrelated to fishing trips,

such as meals and souvenirs, are "direct" effects even when

recreational fishing comprises only part of a vacation or

trip.

"Indirect" and "induced" effects in input-output analysis arise only after increased revenues and income are

respent in the economy. Note that depending on how the

transaction flow table is configured, wholesale and retail

trade of fish products could arise only from "indirect" and
________________________ Edwards: Economics Guide to Allocation of Fish Stocks 17

engines, fishing gear, tackle, gasoline, bait, and ice (most

of which are part of "direct" effects in input-output

analysis), but, unlike input-output analysis, strictly excludes "induced" effects from the sale of products unrelated to fish or fishing such as souvenirs, visits to tourist

attractions, and meals eaten on the fishing trip. However,

two basic and sensible assumptions of benefit-cost analysis

are that: 1) losses attributable to obsolete inventories of

processed products such as fishing gear will be short-lived

(and possibly negligible if the regulations are phased in);

and 2) all primary inputs other than fish (many of which

are part of "direct" impacts in input-output analysis) will

be employed in other industries producing similarly valued

commodities if not engaged in fish-dependent trades. Consequently, the possible "indirect" and "induced" components of changes in net national benefits are generally

assumed to be zero unless prices in these related markets

are expected to change. ll

A final issue concerns the temporal distribution of effects. Input-output analysis abstracts from time, giving no

indication of when or for how long impacts might take

place. In contrast, the net economic value and resource

costs of a proposed fishery regulation are intimately connected with time in a benefit-cost analysis, usually through

the dynamics of the fish population and consideration of

income flows to those affected.

Efficient Allocation _

An appropriately standardized benefit-cost analysis of

allocation between commercial and recreational fisheries

would determine whether any of a set of proposed management measures would increase net national benefits

from the use of fish for food and sport. As emphasized in

the Comparison of BCA and lOA section, the comparison

would include all relevant users from harvesters to consumers but exclude purely financial considerations

(Fig. 7). Taken one step further, the analysis would identify which combination of shares would maximize net

national benefits from use of a total allowable catch. Depending on the costs of management, the search for the

most efficient allocation system could be tantamount to

finding the one which maximizes the sum of consumer and

producer surpluses in both uses. This section draws on

the foundation of previous sections in order to illustrate

several important-and possibly surprising-properties of

such a maximization. In order to simplify the exercise,

research, enforcement, and administration costs are assumed to be equal across allocations. These costs could be

accounted for, however, in an actual application. See

IIThis assumption is weakened by deviations from full employment and

from pure competition in input markets and by anything shon of instantaneous adjustment in input markets and costless relocation of inputs.

Rothschild et al. (1977) and Sutinen (1980) for related

presentations.

The guide also culminates here by underscoring two

mistaken arguments which characterize ,the commercialrecreational controversy. As emphasized previously, the

improper use of input-output analysis to determine the

relative economic value of commercial and recreational

fisheries is promoted by sport fishing constituencies when

revenues from the sale of fishing supplies and other goods

and services to anglers (even goods and services which are

unrelated to recreational fishing) are greater than dockside

revenue and, sometimes, retail sales of seafood to consumers. The fishing industry has also indulged in this

reasoning. This revenues-argument was discussed in the

Benefit-Cost Analysis section and the Input-Output Analysis section. Also, exclusive use of a fish resource cannot be allocated even on the basis of which use derives

the greatest total net economic value, let alone on the

basis of total revenues (or expenditures). Contrary to this

"total value argument," tradeoffs in net national benefitsfrom

changes in shares of a catch quota must be used to identify an

efficient allocation of a fish stock between commercial and recreational fisheries.

An Illustration

In Figure 8, let the entire seafood sector be represented

by a single demand curve that combines final demand by

consumers with "derived" demands for intermediate fish

products by all suppliers which distribute, process, and

market fish in the seafood sector (Fig. 8, A and B). That

is, the entire seafood sector's demand curve portrayed in

Figure 8 actually includes producer surplus (as well as consumer surplus) in all markets which eventually make

seafood available to consumers. Accordingly, the demand

curve for the seafood sector subsumes consumer surplus

and producer surpluses for each industry except the commercial fishing industry itself. 12

The anglers' demand curve for sport-caught fish is portrayed in Fig. 8, C and D. Attributing all consumer surplus

of sport fishing to the sport-caught fish would overestimate

the value of sport-caught fish to anglers because other factors, including being outdoors and camaraderie, are also

part of the fishing experience (Dawson and Wilkins 1981;

Fedler 1984). Accordingly, only the demand for sportcaught fish is illustrated in Figure 8.

For simplicity, let producer surplus be zero for owners

of commercial fishing vessels, although this assumption is

false for "highliners" in a fishery. Also, the sport fishery

could be diversified by adding producer surplus for the

charter boat industry. However, expanding this exercise

12Just et al. (1982) developed the general theory of "equilibrium" sector

demand models. Unlike dockside demand, equilibrium demand for landings allows prices in other related markets to adjust endogenously.
18 NOAA Technical Report NMFS 94 _

B

o

Figure 8

Effects of allocation on net national benefits (i.e.,

net economic value) in the seafood and sport fishing

sectors.

Seafood Sector

~REREGULAnON AFTERREGULAnoN

BEFORE REGULATION AFTER REGULA110N

Sport Fishing S8CtQr

to include these industries would only complicate the task

without adding new insights.

As is usually the case, assume that resource costs can

be accurately measured by the prices of fishing gear and

other goods and services used to catch fish. Accordingly,

let the initial resource costs of landing fish in the seafood

sector be equal to the exvessel price of $4 per pound offish.

Also, at the current stock size let the resource costs of bait

and other factors used to gain access to and to catch sport

fish be constant at $6 per pound. That is, the anglers' costs

of catching fish translates to $6 per pound.

Assume also that the hypothetical, open access fishery

currently suffers from recruitment overfishing and that current landings of the 16 million pounds are not sustainable,

but that a maximum sustainable yield of 12 million pounds

offish a year is considered by management to be "optimal"

for increasing and stabilizing the stock. 13 At the larger

stock size, let resource costs decline to $2 and $5 per pound

in the seafood and sport fishing sectors, respectively,

because the larger stock will increase productivity of both

commercial fishermen and anglers (Fig. 8, B and D). If

all resource costs associated with fishery management are

independent of the management strategy (admittedly a

naive assumption), how should the total allowable catch

of 12 million pounds be allocated in order to maximize total

net economic value? Other potentially important aspects

of this allocation question, such as competition for space

or local concentrations of fish and how fish size affects commercial and recreational value, could be factored in, but

this complexity would also unnecessarily complicate the

analysis.

If management followed the total value argument, or

even, in this exercise, the revenues-argument, the species

would be designated a game fish because both net economic

13This simplified exercise abstracts from a formal economic assessment

which simultaneously solves for the most efficient total allowable catch

and shares. Also, I ignored stock externalities and the associatec intertemporal social costs which give rise to the open access problem. See

Bishop and Samples (1980) and McConnell and Sutinen (1979) for

bioeconomic models of commercial and recreational harvesting in an

optimal control framework. However, the exercise conforms to standard management practice of first using biological criteria to determine

total allowable catch from a stock or management unit, and then

allocating total allowable catch to user-groups.
________________________ Edwards: Economics Guide to Allocation of Fish Stocks 19

Pounda of Fllh (million)

Figure 9

Total net national benefits (i.e., net economic value) from allocation of the 12 million pound total allowable catch quota.

8 10 12

I

4 2 0

5.8 Recreational quo"

10 8

024

CommercIa' quotll

I

12

$100

$80

I

I $75

I $50

i

z

'5

z $25

value and total expenditures in the sport fishery ($49 and

$42 million, respectively) are greater than their commercial counterparts ($27 and $36 million, respectively; Fig.

8, A and C). In fact, though, the allocation that maximizes

total net economic value in the combined sectors actually

slightly favors the seafood sector in this exercise!

To understand this possibly surprising result, first assign

the entire total allowable catch of 12 million pounds of fish

to commercial fishermen as begun in Figure 8B (the final

shares are independent of the starting point). Next ask

whether total net economic value would increase if the commercial fishing quota is reduced by, say, one million to

11 million pounds and the anglers' quota is simultaneously increased from zero to one million pounds. The partitions of the respective net value "triangles" in Figure 8,

Band D show that the approximate $0.33 million loss in

net economic value in the seafood sector is considerably

less than the $14.00 million gain in consumer surplus by

anglers, therefore, the new allocation results in an overall

net gain of about $13.67 million in total net economic

value.

Next ask whether total net economic value would increase further if the commercial fishing sector's share of

the catch quota is reduced by a second million pounds of

fish and the recreational quota is increased by one million

to two million pounds? Total net economic value increases

by $11.00 million (i.e., $12.00 million minus $1.00 million)

from this second adjustment. The allocation of a third one

million pounds increases total net economic value too, but,

again, by a lesser amount ($10.00 million minus $1.67

million, or $8.33 million). The process continues until,

finally, total net economic value is maximized when about

5.6 million pounds of fish are allocated to anglers, and

about 6.4 million pounds offish are allocated to the seafood

sector.

Any adjustment in this maximally efficient allocation in

favor of standard notions of equity or fairness would reduce

total net economic value from use of the fish stock. For

example, making the allocation equal by further reducing

the commercial quota by about 0.4 million to 6 million

pounds would increase consumer surplus for anglers by

$1.27 million, but at the same time reduce net economic

value in the seafood sector by more-by $1.45 million. In

contrast, a share system which maintains the historical proportions of landings-56 % for the commercial fishery

(9/16), or 6.8 million pounds, and 44% for the sport fishery

(7/16), or 5.2 million pounds-would diminish total net

economic value too. Relative to the maximally efficient

allocation, net economic value in the seafood sector increases by $1.35 million with an increased share of 0.4

million pounds, but net economic value in the sport fishing

sector decreases by $1.55 million. (This tradeoff is not obvious from Figure 8.)

The efficient allocation of the 12 million pound total

allowable catch may be easier to envision in Figure 9. Here,

the vertical axis records net economic value from Figure

8, Band D, for the seafood sector, the sport fishing sector, and the two sectors combined. The horizontal axis

records total allowable catch. The possible commercial and

sport fishing shares run in opposite directions, such that

at any point along the horizontal axis, the sum of the two

shares is 12 million pounds.

The curve that increases steadily from left to right traces

the cumulative amount of consumer and producer surpluses
20 NOAA Technical Report NMFS 94 _

I'This and other results of this exercise can be shown mathematically.

The demand models used to generate Figures 8 and Y.

Next. maximize the sum of VI and v, with respect to the shares, ql and

q" subject to the constraint imposed by the total allowable catch

quota:

where ql and q, are quantities demanded in the seafood and sport fishing

sectors, respectively, and c

i and c, are the corresponding costs of fish.

Holding costs constant at $2 per pound in the seafood sector and $S

per pound in the sport fishing sector, the expressions for net value (v)

in the respective sectors are

in the seafood sector as the commercial fishery's share ill'

creases from zero to 12 million pounds. For example, when

exvessel price is held constant at $2 per pound as in Figure

8B (this is still assumed to measure resource costs), llet

economic value in the seafood sector increases from $0 to

$7.7 million and then to $14.7 million when the corr. mercial fishery's share increases from zero to one million and

then to two million pounds. Similarly, the curve that illcreasesfrom right to lift accumulates the anglers' consumer

surplus as their share of total allowable catch increases frum

zero to 12 million pounds. For example, when the resource

costs of sport-caught fish are $5 per pound (Fig. 8D), con·

sumer surplus increases from $0 to $14 million and then

to $26 million as the anglers' share increases from zero to

one and then to two million pounds. Total consumer

surplus for anglers levels off at about 7.5 million pounds

because, in this exercise, the anglers are not willing to pay

$5 to catch additional Jish (see the anglers' demand in

Fig.8D).

The "hill" in Figure 9 traces total net economic '/alue

in the combined sectors for each possible share sy~tem.

Graphically, this hill is the vertical summation of net

economic value in each sector. It is clear from this top curve

that total net economic value is maximized at the apex,

or at about $90 million where, as above, the anglers' share

is about 5.6 million pounds of fish and the commercial

fishermen's share is 6.4 million pounds. Any deviation

from these shares would reduce total net economic value,

including, as we saw above, "fair" allocations such as an

equal apportionment or a system that is proportional to

historical or current use.

Although not obvious from Figure 9, the net economic

value of the 5.6 millionth fish in the sport fishery and the

6.4 millionth fish in the seafood sector are equal at nearly

$3.75 14 This latter property of the maximally efficient

allocation illustrates the economic principle that in order

to maximize the total net economic value from using fish

where 1] is the Lagrangian multiplier. In this application, 1] is the net

economic value ofthe marginal, or "final," fish allocated to both uses.

The solutions to this system are ql 6.375, q, = 5.625, and 1] = $3.73.

Finally, substituting the shares into their respective net benefit equations and adding the results yields $90.12 million in net economic value

($37.39 million in the seafood sector and $52.73 million in the sport

fishing sector).

I'This principle holds whenever the economic value of competing uses

is compared, including conflicts between fishing and waste disposal, oil

production, habitat destruction, and aquaculture.

for food and sport, an allocation must equate marginal

net economic values from each conflicting use of the fish

stock. IS

Summary

The exercise in this section emphasized the importance of

determining efficient allocations of a fish stock on the basis

of incremental tradeoffs in net economic values-the difference between total economic value and total resource

costs-when different uses are in conflict. Had the total

value-argument (or revenues-argument) been applied and

the total allowable catch been awarded completely to

anglers, total net economic value would be only about

$56.25 million (i.e., the entire area under the anglers'

demand curve in Figure 8D and abow the $5 cost line)

instead of the $90 million achieved by the efficient allocation that includes the seafood sector. Indeed, in this exercise the stock would be underutilized if the entire total

allowable catch of 12 million pounds was awarded to

anglers because sport fishing costs amounting to $5 per

pound of sport-caught fish result in a harvest of only about

7.5 million pounds by anglers (Fig. 8D).

Also notice that total net economic value in the regulated

fishery (i.e., $90) is greater than under open access conditions (i.e., $76 million-see Fig. 8, A and C). Therefore,

the regulation would pass the benefit-cost criterion to

increase net economic value (provided that the increase

in the total resource costs of management-including

administrative, scientific assessments, and enforcement

costs-is less than the increase in consumer and producer

surpluses over time).

Finally, in this exercise the efficient allocation happens

to increase surplus benefits in each sector (compare surplus

values in Fig. 8A with Fig. 8B and in Fig. 8C with Fig.

8D). This improvement in each sector's net economic value

occurs despite the reductions in total expenditures in each sector that result from how a larger stock size is expected to

increase the productivity of anglers and commercial

fishermen!

Of course, the maximally efficient solution to an actual

fish allocation problem will be influenced strongly by the

position and shape ofthe respective seafood and angler demand curves, as well as by the fish stock's population

dynamics and the sensitivity of resource costs to stock size.

IOql - 0.33Sq} - 2ql

20q, - 1.OOOq/ - Sq,.

IS I. SCI

10 - O.S,..

y[aximize·,r. v (VI + v,) + 1](12 - ql - q,),

Seafood sector: VI

Sport fishing sector: v,

Seafood sector: qJ

Sport fishing sector: q.
________________________ Edwards: Economics Guide to Allocation of Fish Stocks 21

In fact, it is conceivable that based on economic efficiency

alone, the elimination of either a commercial or sport

fishery would be necessary to maximize net national

benefits. This would occur, for example, when the marginal

net economic value of one use was everywhere greater than

for the other use within the bounds of total allowable catch.

Summary and Conclusions _

As stated in the Introduction, this guide was written both

to expose specious economic-sounding arguments often

heard when fish allocations are debated by commercial and

recreational constituencies, and to provide fishery managers, policy makers, and other interested parties with a

foundation in benefit-cost analysis as it applies to the allocation of a fish stock among competitive uses. Accordingly,

the Economic Value section defined economic value; the

Benefit-Cost Analysis section presented the elements of

benefit-cost analysis; the Input-Output Analysis section

outlined the elements of input-output analysis in order to

explain why this methodology cannot be used as a surrogate

for benefit-cost analysis; the Comparison of BCA and lOA

section contrasted benefit-cost analysis and input-output

analysis in greater detail; and the Efficient Allocation section illustrated the properties of an efficient allocation of

total allowable catch between the seafood producing and

the recreational fishing sectors.

Economic assessments of fishery allocations emphasize

the following conclusions:

• In benefit-cost analyses of fishery management, economic value is the maximum amount that consumers

are willing to pay for fish for food and for recreational

fishing, and economic costs are the economic value of

foregone production when resources such as labor,

capital, and fish stocks are used to produce seafood or

sport-caught fish instead of other goods or services which

are valued by consumers and which would contribute

to the nation's GNP. Neither expenditures nor revenues

are notions of economic value. Net national benefits are,

by definition, the difference between gross, or total, economic value and resource costs. Put another way, net

national benefits are the sum of consumer and producer

surpluses for seafood consumers, anglers, and all industries that catch, land, distribute, process, or otherwise make fish available to seafood consumers and

anglers.

• Input-output analysis was originally developed to

describe a region's industrial network and interdependencies in terms of expenditures and revenues. Multipliers are very useful indices of a region's self-sufficiency

in input and output requirements and of the distribution

of financial assets within a region. However, output

multipliers and financial impacts have no relationship

to benefit-cost analysis. Input-output analysis is not a

surrogate for benefit-cost analysis.

• A fishery regulation which increases net national benefits

promotes the efficient use of publicly owned fish stocks

and, thereby, improves the overall economic well-being

of the nation, although, generally, net national benefits

will actually be concentrated regionally. An economically

efficient allocation cannot be determined, however, from

historical catch or equal shares, consumer expenditures,

industry revenues, output and other input-output multipliers, or even a simple comparison of which sector leads

to the higher total level of consumer and producer

surpluses. Instead, net national benefits are enhanced

when the combination of consumer and producer surpluses

in both the seafood and sport fishing sectors are increased.

Changes in economic surpluses in related input and retail

markets (e.g., labor, gasoline, ice, fishing nets, tackle,

meals, lodging) should be counted as negligible or zero

unless there is significant unemployment of labor,

capital, and/or natural resources.

If this guide clarifies concepts and methods applicable

to benefit-cost analyses of fishery allocation, then it also

underscores considerable incompatibilities among social

goals and the influence of vested interests. That is, an inefficient regulation may support more jobs or may somehow appear "fair" if both the value-based and purely

financial benefits and costs are shared more equally. Indeed, the most efficient regulation of a fishery will not

necessarily promote a "fair" distribution of, say, consumer

surplus and industry profits.

Clearly, given concerns about "fairness" and other

social goals, conflicts surrounding fish allocations will be

resolved politically whereas this guide focuses only on

economic efficiency and the appropriate application of

benefit-cost analysis. Nevertheless, deviations from the

most efficient use of publicly owned fish stocks must be

quantified and compared to net gains in employment and

the distribution of financial assets which are expected from

alternative management measures if informed decisions are

to be made. This is the only way to gauge whether gains

in areas other than efficiency actually justify losses in net

national benefits.

Acknowledgments

This report is, in effect, a collaborative effort, although I

am solely responsible for any errors or omissions. Phil

Logan, Chief of the Economics Investigation at the Northeast Fisheries Center, NMFS, suggested that I write the

report and devoted untold hours to thorough reviews. Dan

Huppert, Wally Milon, andJon Sutinen also commented

extensively on an early draft. Others providing constructive comment were Jack Doll, William Emerson, John

Gates, Jon Platt, Barbara Pollard, Dave Rockland,

Michael Scott, Tim Tyrrell, John Walden, and the editor's
22 NOAA Technical Report NMFS 94 _

two reviewers, including Terry Smith. Brenda Figuerido,

the Center's graphics artist, provided able graphics

assistance.

Citations

Agnello, R.J.

1988. Economic valuation of marine recreationallishing. Paper

presented at the Symposium on Demand and Supply of Sport

Fishing, Charleston, SC, March 14-15, 191.18, p. 22··37.

Archer, B.H.

1977. Tourism multipliers: the state of the art. Univ. WaJes Press,

Cardiff, England.

1984. Economic impact: misleading nlultiplier. Ann. Tourism

Res. 11:517-518

Bishop, R.C., and K.C. Samples.

1980. Sport and commercial fishing conflicts: a theoretical analysis.

J. Environ. Economics and Management 7:220-233.

Bockstael, N.E., and K.E. McConnell.

1981. Theory and estimation of the household production function for wildlife recreation. J. Environ. Econ. Manage. 8:

119-214.

Bockstael, N.E., and I.E. Strand Jr.

1985. Distributional issues and nonmarket bendit measurement.

West. J. Agricultural Economics 10:162-169.

Bockstael, N.E., I.E. Strand Jr., and W.M. Hanemann.

1987. Time and the recreational demand model. Am. J. Al!;ricultural Economics 69:293-302.

Brown, G. Jr., and R. Mendelsohn.

1984. The hedonic travel cost method. Rev. Economics and

Statistics 66:427-433.

Cummings, R.G., D.S. Brookshire, and W.D. Schulze, eds.

1986. Valuing environmental goods: a state of the arts ass~ssment

of the contingent valuations method. Rowan and Allanheld,

Totowa, NJ, 288 p.

Dawson, C.P., and B.T. Wilkins.

1981. Motivations of New York and Virginia marine boat anglers

and their preferences for potentiallishing constraints. North Am.

J. Fish. Management 1:151-158.

Edwards, S.F.

1981 . Econometric and welfare analyses 01 the atlantic sea scallop

markets. M.S. Thesis, Univ. Rhode Island, 87 p.

Fedler, A.J.

1984. Elements of motivation and satisfaction in the marine recreational fishing experience. Mar. Recreational Fish. 9:75-83.

Gittenger, J.P.

1982. Economic Analysis of Agricultural Projects. John Hopkins

Univ. Press, Baltimore, MD, 325 p.

Greenwald, D. and others.

1983. The McGraw-Hill dictionary of modern ecollomics.

McGraw-Hill Book Co., NY, 408 p.

Harris, C.C. Jr. and V.J. Norton.

1978. The role of economic models in evaluating commercial 1ishery

resources. Am. J. Agricultural Economics 60:1013-1019.

Haveman, R.H. and J.V. Krutilla.

1968. Unemployment, idle capacity. and the evaluation of public

expenditures: national and regional analyses. John Hopkins

Univ. Press, Baltimore, ~D, 169 p.

Hushak, L.J.

1987. Use of input-output analysis in fisheries assessment. Trans.

Am. Fish. Soc. 116:441-449.

Hushak, L.J., G.W. Morse, and K.K. Apraku.

1984. An input-output analysis of the economic impact of Ohio's

Lake Erie fishery and other resources on a northern Ohio regional

economy. Tech. Bull. OHSU-T-84-013, Ohio State Univ. Sea

Grant Program, 105 p.

Isard, W.

1975. Introduction to regional science. Prentice-Hall, Inc., Englewood Cliffs, NY, 310 p.

Just, R.E., D.L. Hueth, and A. Schmitz.

1982. Applied welfare economics and public policy. PrenticeHall, Inc., Englewood, Cliffs, NY, 491 p.

McConnell, K.E.

1985. The economics of outdoor recreation. In Handbook of

natural resource and energy economics, Vo!. II (A.V. Kneese and

J.L. Sweeney, eds.), p. 677-722. Elsevier Science Pub!. B.V.,

Amsterdam.

McConnell, K.E., and V.J. Norton.

1976. An economic evaluation of marine recreational fishing. In

Proceedings of the first annual marine recreational fisheries symposium (H. Clepper, ed.), p. 12-28 Mar. Recreational Fish.

2:12-28.

McConnell, K.E., and J.G. Sutinen.

1979. Bioeconomic models of marine recreational fishing. J. Environ. Economics and Management 6:127-139.

1982. Using the household production function in bioeconomic

models, Chap. 12. In Essays in the economics of renewable

resources (L. Mirman and D.F. Spulber, eds.), p. 227-238.

North Holland Pub!. Co., NY.

Miernyk, W.H.

1966. The elements of input-output analysis. Random House,

NY, 159 p.

Miller, R.E., and P.D. Blair.

1985. Input-output Analysis: Foundations and Extensions. Prentice-HalJ, Inc., Englewood Cliffs, NY, 464 p.

Mitchell, R.C., and R.T. Carson.

1989. Using surveys to value public goods: the contingent valuation method. Resources for the Future, Washington, D.C.

Propst, D.B., and D.G. Gavrilis.

1987. Role of economic impact assessment procedures in recreational fisheries management. Trans. Am. Fish. Soc. 116:

450-460.

Randall, A.

1987. Total economic value as a b~sis for policy. Trans. Am. Fish.

Soc. 116:325-335.

keady, R.C., and R.C. Bishop.

1988. The value to consumers ola Great Lakes commercial fishery.

Paper presented at the Symposium on Demand and Supply of Sport

Fishing, Charleston, SC, March 14-15, 1988,94-104 p.

Richardwn, H.W.

1972. Input-Output and Regional Economics. Weidenfeld and

icholson, London, 294 p.

Rothschild, B.J., J.M. Gates, and A.M. Carlson.

1977. Management of marine recreational fisheries. In Proceedings of the first annual marine recreational fisheries symposium

(H. Clepper, ed), p. 149-172. Mar. Rec. Fish. 2.

Scott. M.

1984. A fishery manager's guide to understanding secondary economic impact of northwest salmon and steelhead. In Making

economic information more useful for salmon and steelhead production decisions. NOAA Tech. Memo. NMFS F/NWR-8,

p. 243-269.

Surinen, J.G.

1980. Economic principles of allocation in recreational and commercial fisheries. In Allocation offishery resources (J.H. Grove,

ed.), p. 432-436. FAO, New York.

Talhelm, D.R. (ed.)

1987. Proceedings of the symposium on social assessment of fishery

resources. Trans. Am. Fish. Soc. 116(3), p. 289-540.
_________________________ Edwards: Economics Guide to Allocation of Fish Stocks 23

Appendix A: Glossary and Index

See Greenwald et al.'s (1983) dictionary of economics for additional concepts. Page numbers follow each definition.

aggregate demand-the sum of each person's demand. (p. 5.)

benefit-in benefit-cost analysis, "benefit" is synonymous with

value, or the maximum willingness-to-pay for a good or service, including environmental resources and services. It

derives its monetary units from the willingness of consumers

and producers to exchange income and revenue for goods,

services, and inputs, but "benefits" could, in principle, be

measured in terms of any constraint on choices, including

leisure time. Total benefits include expenditures. See consumer surplus, producer surplus, and net national benefits.

(p. 6.)

benefit-cost analysis-a methodology that compares economic

value and the opportunity costs of using productive resources

(i.e., resource costs). A project or regulation is efficient if

its total value exceeds its resource costs (i.e., if the change

in net national benefits measured in terms of changes in consumer surplus and producer surplus is positive). (p. 6.)

common property-classically, a resource such as a fish stock

in the Extended Economic Zone, but also resources such as

groundwater and open space, which are publicly owned and

can be used in a physical sense. Because of the absence of

private property rights and because users cannot be excluded

from the resource, common property is generally "overexploited" in the sense that one person's use affects the productivity of others or the value that others derive from the

resource. (p. 1.)

consumer surplus-the net economic value from consumption

or use of a good or service. It is the difference between the

maximum that a person is willing to pay for the good or service rather than do without it and what he/she actually

spends. The adjective, "consumer" is misleading because

this category of value also applies to nonconsumptive uses

(e.g., observing salmon runs) and to nonuse benefits (e.g.,

protecting marine mammals from exploitation). (p. 4.)

contingent valuation method-a survey methodology in economics that is often used to elicit the value of natural

resources and environmental services which are not adequately traded in markets. (p. 6.)

cost-see expenditures, opportunity costs, and resource costs.

(p. 6.)

demand-in economics, the usually inverse relationship between

quantity consumed (or otherwise used or even preserved)

and a person's maximum willingness-to-pay for incremental increases in quantity. Market prices often (but not always)

reveal the increments of willingness-to-pay. Other factors influencing willingness-to-pay include income, prices of substitutes, and, in recreational fishing, catch rate. Unlike planning where demand refers to the size of the quantity variable,

economic demand is a behavioral relationship. (p. 4.)

direct effects-in input-output analysis, the amount of inputs

required to produce the output necessary to satisfy final

demand. (p. 11.)

economic impact analysis-see input-output analysis, the principle method. (p. 10.)

economics-in this primer, the study of how individuals and

groups allocate scarce stocks such as income, time, and fish

among competitive uses, and the responses to limitations on

their choices, including fishery regulations. (p. 1.)

efficiency-in economics, an objective evaluation of the net national benefits of a public project or government regulation.

Efficiency increases in proportion to increases in consumer

surplus and producer surplus. (p. 8.)

expenditures-financial costs. Contrast with opportunity costs

and resource costs. (p. 6.)

final demand expenditures-in input-output analysis, expenditures by consumers, investment by industry, government

expenditures, and exports from the regional economy.

(p. 11.)

final products-output sold to consumers. Contrast with intermediate product. (p. 11.)

financial analysis-cost accounting based on market prices as

opposed to opportunity costs. Financial analysis is an important application of economic impact analysis. (p. 7.)

income-payments received by labor and other primary inputs

including owners of capital and natural resources. (p. 10.)

indirect effects-in input-output analysis, the amount of inputs

required to satisfy derived demands by industrial sectors after

the first round of direct effects (p. 12.)

induced effects-in input-output analysis, the amount of inputs

required to satisfy further increases in final demand which

are induced by payments to primary inputs in response to

direct and indirect effects. (p. 12.)

inputs-both a productive resource, such as labor, capital, land,

water, and fish, which is used to produce an output for use

by other industries or by consumers (also called factor of production) and intermediate products. In input-output analysis,

inputs are expressed as expenditures. (p. 10.)

input-output analysis-a systematic method that both describes

the financial linkages and the network of input supplies and

production which connect industries in a regional economy

(however defined), and predicts changes in regional output,

income, and employment. Input-output analysis generally

focuses on economic activity and the self-sufficiency of an

economy, unlike benefit-cost analysis which focuses on

changes in net national benefits from use of productive

resources. See benefit-cost analysis and multipliers.

(p. 10.)

intermediate product-a processed product from one industry

which becomes an input in another industry. Contrast with

primary input and final product. (p. 11.)

Keynesian multiplier-see multiplier.

marginal-a mathematical concept that in economics refers to

very small, incremental changes in value and resource costs

which add to or detract from the total amount. It gives rise

to concepts such as marginal cost, marginal revenue, and

marginal willingness-to-pay. (p. 20.)

multiplier-as generally used in input-output analysis, the ratio

of total impacts on output, income, or employment in a

regional economy divided by the respective direct impact

initially generated by investment or consumer expenditures.

The size of a ratio multiplier is indicative of the self-sufficiency of a regional economy's industrial complex, but ratio
24 NOAA Technical Report NMFS 94 _

multipliers should be interpreted with extreme caution when

comparing the potential impact of alternative public investments and government regulations. Unlike ratio multipliers,

Keynesian multiplier is the total impacts on output, income,

or employment per dollar of initial investment or consumer

expenditures. Type-I multiplier (either ratio or Keynesian)

includes direct and indirect effects of investment and consumer expenditures. Type-II multiplier also includes induced effects. (p. 12.)

net economic value-the net result after subtracting resource

costs from consumer surplus and producer surplus. (p. 7.)

net national benefits-consumer surplus (total maximum willingness-to-pay minus expenditures) plus producer surplus.

See value and resource costs. (p. 7.)

opportunity costs-generally intended to refer to foregone economic value when a productive resource, such as labor,

capital, land, or fish, is used to produce one good or service

instead of something else. See resource costs. (p. 7.)

output-a good or service created by a production process. In

input-output analysis, output is sales or revenue. Contrast

with intermediate product. (p. 10.)

primary input-in input-output analysis, labor, capital, entrepreneurial skills, taxes, rent payments, and imports used to

produce goods and services. See income and value-added,

and contrast with intermediate product. (p. 11.)

producer surplus-total revenue minus all opportunity costs of

production, including the opportunity costs of the entrepreneurs' skills, labor, capital, and ownership of natural

resources. (p. 8.)

profit-total revenue minus all financial costs for inputs, but not

the opportunity costs attributable to entrepreneurs. Contrast

with producer surplus. (p. 5.)

quantity-demanded-the amount of fish, fishing trips, or any

other good or service purchased by a consumer at a given

price or cost. In every day language, this is referred to as

"demand." (p. 5.)

ratio multiplier-See multiplier.

resources-the productive inputs, labor, capital, fish, land, and

other natural resources. (p. 7.)

resource costs-the value of forgone production when productive resources are used to produce one good or service instead ofsomething else. This phrase is less ambiguous than

opportunity costs because the latter could actually be applied

to financial costs. (p. 6.)

revenues-gross financial benefit to producers. See profit.

(p. 7.)

sectors-a group of industries which share a common characteristic. In input-output analysis, the industries in a

sector have similar input requirements. In benefit-cost

analysis, a sector tends to be a chain of vertically-integrated

industries which increasingly transform a raw material into

a form sold to consumers (harvest-wholesale-retail).

(p. 10.)

supply-schedule of the quantities of goods and services that a

business is willing to sell at various output prices. Other factors that affect supply include input prices. (p. 7.)

technical coefficients-in input-output analysis, the average

amount of a sector's input which is required to produce $1

of output. (p. 11.)

total effect-In input-output analysis, the amount of output, income, or employment generated by a dollar of final expenditures, including the influence of respending. Total effects

are also called Keynesian multipliers. See multipliers.

(p. 12.)

transactions flow table-in input-output analysis, a matrix which

organizes input requirements of a regional economy and the

distribution of output among industrial sectors and final demand. (p. 11.)

transfer payments-transfers or exchanges of money (e. g., taxes,

unemployment compensation, subsidies). Transfer payments

redistribute income but not the total value of production.

Hence, net national benefits are not affected by transfer

payments. (p. 7.)

travel cost method-a methodology which uses travel-related

costs to measure willingness-to-pay for natural resources and

services, such as fishing trips and catch rates, and to estimate

demand models. (p. 6.)

type I multiplier-see multiplier.

type II multiplier-see multiplier.

value-see maximum willingness-to-pay. Net value from consumption is consumer surplus and net value from production is producer surplus. In economics, value should be

distinguished from financial benefits. It is misleading,

therefore, that in benefit-cost analysis a "benefit" is a gain

in consumer and producer surpluses and a "cost" is a loss

in economic value (i.e., a resource, or opportunity cost).

(p. 3.)

value-added-the difference between the price of a business's

output and the opportunity costs of intermediate products

used to produce the output. In input-output analysis, it is

the increased value contributed by primary inputs, excluding

imports. (p. 11.)

willingness-to-pay-in economics, what consumers are willing

and able to pay for goods and services (including environmental goods and services) or what producers are willing and

able to pay for inputs. (p. 4.)
_______________________ Edwards: Economics Guide to Allocation of Fish Stocks 25

Appendix B: Elements of Input-Output Analysis -------------------

Notice that routine input-output analysis requires a sector's inputs and outputs to be equal (i.e., Xi = A;)

Accordingly,

This appendix presents technical aspects of input-output

modeling. It begins with the transactions flow table presented in Section IV that is based loosely on Hushak's

(1987) study of Ohio's Lake Erie commercial and recreational fisheries. See Archer (1977), Isard (1975), Miernyk

(1966), Miller and Blair (1985), Propst and Gavrilis (1987),

and Richardson (1972) for more details on modeling

procedures.

Nearly all information required for standard inputoutput analysis is contained in a transactions flow table

such as Table 4. The analysis is facilitated if we recognize

that much of this table can be expressed in matrix form

as a system of equations. Accordingly, the output of a producing sector is

fishing sector can be expressed as

o + 2 + 2 + 3 + 3 = 10.

m m

2 XI 2 Aj, and

i 1 j-I

2 FI 2 (lj + ~).

i=m+ 1 j-m + 1

(4)

(5)

(6)

For example, the input requirements for the recreational

Similarly, inputs required by a purchasing sector are

where "i" and ".i" designate rows and columns, respectively. For example, the row for recreational fishing can

be written

Also, regional income must equal final demand expenditures, adjusted for imports.

Together, Equations (1-6) are used to "reconcile," or

balance the transactions flow table for a regional economy.

Data plugged into the table can be.primary data collected

from regional surveys, or they can be secondary data

generated from technical coefficients from another inputoutput model and from average output, input, and income

relationships reported by the Bureau of the Census (e. g.,

Hushak et al. 1984). Often, regional economists use the

"semi-survey" approach which combines surveys of sectors that are important to the analysis (e.g., commercial

fishing and charter boat fishing) with secondary data.

What follows from here depends upon which primary

input sectors and final demand sectors are included in the

analysis. We begin with an analysis of type-I effects for

which only sectors producing intermediate products are endogenous. Notice that Equations (1 and 2) for a single producing sector can be rearranged such that

o + 2 + 1 + 4 + 3 = 10. (2)

m n

2 X + 2 F Xi, (1) I) I

j-I i=m+ 1

intermediate final total

demand demand output

m

2 X , + V + I Xi' (3) I) ) )

i-I

intermediate value-added import total

demand demand demand inputs

Table 4

Transactions flow table ($ millions).

Commercial

fishing

Purchasing sectors

(i.e., intermediate demand)

Recreational

fishing

All other

industries

Final demand

expenditures

Households Exports Output

Commercial fishing

Recreational fishing

All other industries

o

o

2

Producing sectors

o 7

2 I

2 43000

o

4

38000

3

3

18996

10

10

100000

Value-added

Imports

Total inputs

7

1

10

Primary inputs

3 49992

3 7000

10 100000

o

10000

48004

- 17004

1998 100020
26 NOAA Technical Report NMFS 94 _

Furthermore, if the amount of sector i's output purchased

by each of the purchasing sectors is a linear function of

the latter's output, we can express Equation 7 as

Equation (12). In our example, the direct requirements for

value-added inputs (i.e., income to labor, capital, and land)

are

(7)

(8)

r 7 3 49,992 'J.'

C = liD 10- 100,000 = [0. 7 0.3 0.49992]. (14)

where the aij are the technical input coefficients,

Also, we are using the following direct employment requirements:

(9) D = [0.00003 0.00002 0.00001 ]. (15)

or the direct input requirements per dollar of output.

Equation (8) can be further generalized and used to

derive interdependence coefficients. The system of three equations with form (8) can be written in matrix form,

For example, a dollar of output from the commercial fishing sector requires 0.00003 employees (i.e., each $100,000

of output requires three employees). In turn, the total income effects for each sector are

x - AX = (I - A)X = F, (10) Total income effects = CB (16)

where B is a matrix of interdependence coefficients. In our

example, the B matrix of direct and indirect effects is,

where, in this exercise, A is a (3 x 3) matrix of technical

coefficients and I is a (3 x 3) identity matrix with" 1"s

along the diagonal and "O"s elsewhere. In our example,

where hij is the total inputs required from sector i per

dollar of final demand for sectorj's output. For example,

a $1 million increase in final demand for the recreational

sector's output requires approximately $0.44 million in inputs (j = 2) from industries in the "other" sector (i = 3).

Recall from the Input-Output Analysis section that these

type-I impacts are the sum of direct and indirect effects.

Output multipliers associated with a change in final demand for each sector's output are simply the sums of the

respective sectors' interdependence coefficients. Thus, the

output multipliers for the commercial fishing, recreational

fishing, and "other" sectors are 1.35091, 1.68865, and

1. 75458, respectively. A sector's output multiplier expresses the total input requirements from all sectors required to produce $1 of its output.

Total impacts and ratio multipliers for income and

employment are derived from their direct requirements and

X = (I - A)-IF = BF,

(18)

0.0000001

0.000083

0.791600 .

0.000000

0.0 0.0 0.00007

0.0 0.2 0.00001

0.2 0.2 0.43000

0.7 0.3 0.49992

A

Notice that the fourth column corresponds to household

expenditures and is calculated by dividing entries in the

transactions flow table by total household expenditures

(i.e., by $48,004).

Calculation of total type-II effects and ratio multipliers

is analogous to the type-I calculations with the addition

of a fourth column for direct income and employment effects in matrices C and D, respectively. In our example,

these columns have zero entries. Type-II results are also

reported in Table 2 in the Input-Output Analysis section.

Total employment effects = DB, (17)

where DB = [0.0000335 0.0000294 0.0000175]. For

example, in this exercise, $1 million of final demand for

recreational fisheries generates about 29 jobs. Finally, the

ratio multipliers for income and employment effects are

simply total effects divided by direct effects. See Table 2

in the Input-Output Analysis section for a summary of the

various type-I impacts and multipliers.

Recall that type-II effects include induced effects. This

expansion of input-output analysis requires the technical

coefficients matrix to be augmented by one row for valueadded inputs and by one column for final household

demand:

where CB = [0.87543 0.59429 0.87717]. For example,

$1 million of final demand for commercial fisheries

generates about $0.88 million in income for primary inputs. Similarly, the total employment effects for each sector are

(13)

( 12)

( 11)

0.00012]

0.00002 ,

1.75444

0.000071

0.00001 .

0.43000 J

0.00003

1.25000

0.43862

0.0

0.2

0.2

f

o.o

0.0

L0.2

[

1.00002

B = 0.00000

0.35089

A

Finally, it follows that
_______________________ Edwards: Economics Guide to Allocation of Fish Stocks 27

Appendix C: General Equilibrium Demand in an Exvessel Market _

Just et al. (1982) present theory and practical advice for

estimating multimarket changes in net economic value

behind a single derived demand curve when a resource

market supplies a necessary input to related markets.!

Their contribution is important in the context of fishery

management because the data required to estimate separate

welfare changes in exvessel, wholesale, and retail markets

for fish generally are not available. This appendix (which

augments the discussions in the Benefit-Cost Analysis section, the Comparison of BCA and lOA section, and the

Efficient Allocation sections of net benefit estimation in

seafood markets) is adapted from Chapter Nine in Just et

al. (1982). Rigorous, mathematical proofs supporting the

heuristic presentation here can be found in their Appendix D, "Welfare Measures for Multimarket Equilibrium."

For empirical applications to commercial fisheries see Edwards (1981) and Ready and Bishop (1988).

This presentation derives from the demand and supply

relationships depicted in Figure 10. Figure lOA contains

the wholesale industry's input demand curves in an exvessel

market for marine fish: De(PwO,d) and De(Pw!,d). Although not shown explicitly, resource supply is assumed

to be perfectly inelastic. For now, ignore D*(d, 8,Pr)' In

Figure lOB, Sw(PeO, d) and Sw(Pe!, d) are wholesale supply

curves and Dr(P" 8) is the derived demand of retailers.

(For simplicity, the various possible wholesale marketsdistributors and processors-are aggregated.) In Figure

laC, we assume for the moment that consumer demand

in the retail market is perfectly elastic and, therefore,

represented by Pr' Sr(PwO, 8) and Sr(Pw1

, 8) are retail supply curves. The other prices, Pe and Pw, are exvessel and

wholesale prices, ge' gw' and gr are exvessel, wholesale,

and retail quantities, and d and 8 are exogenous determinants of wholesale and retail supply, respectively. The

superscripts,°and!, denote initial and final prices and

quantities, respectively.

The starting point for our comparison of welfare

"triangles" in the three markets depicted in Figure 10 is

the understanding that producer surplus measured behind

a retail supply curve is completely captured behind the demand curve for an essential input. 2 Accordingly, area

x + y behind wholesale supply curve, Sw(PeO,d) is equal to

area a + c behind exvessel demand, De(PwO,d). Similarly,

area x + u behind Sw(Pe!, d) is equal to area a + b behind

De(Pwl,d).

Next consider a fishery regulation which effectively increases the stock of fish available to anglers but reduces

commercial catch from geO to gel and increases exvessel

price from Pea to p/-possibly a ban on a commercial

fishing in state waters. This regulation sets off a series of

adjustments in the seafood sector, beginning with a shift

in the wholesale supply curve from Sw(PeO, d) to Sw(Pe!, d).

Consequently, wholesale price increases from Pwo to Pw1,

'Just et al. (1982) define a necessary input (also called essential input)

as one for which a firm will exit the industry if the input is either not

available or priced above the firm's willingness-to-pay.

'This statement derives from duality theory and the envelope theorem.

(See, for example, Just et al. [1982].)

Pe A p. B

-

DW( /I,e,p,) p'.

po.

p'.

po.

I

D.(po•. /I)

I

q. qQ. q. q'. Q Q. q', qr

. qQ,

landings Mar1tet Whol..... Mar1tet Retail Mar1tet

Figure 10

Net national benefits (i.e., net economic value) behind a vertically integrated exvessel demand curve.
28 NOAA Technical Report NMFS 94 _

(19)

At least two properties of equilibrium demand curve (21 )

are important. As illustrated in Figure lOA, the inverted

equilibrium demand model has a steeper slope than the

market demand model. In addition, wholesale price,

Pw, varies endogenously in an equilibrium exvessel demand model unlike in an market demand model where the

wholesale price variable (or an instrumental variable from,

say, the first stage of two stage least squares) is specified.

This feature allows researchers to estimate changes in net

benefits in wholesale and retail markets behind an appropriately specified ex-vessel demand model such as model

(21). Note, however, that dropping related market prices

such as Pw from the exvessel demand curve due to severe

multicollinearity does not accidentally result in a general

equilibrium demand model unless it is accompanied by

specification of the exogenous determinants of wholesale

and retail supply. 4

We can now introduce the effects of a downward sloping consumer demand model. Although not demonstrated

graphically, the equilibrium exvessel demand model becomes D*(d, e,E.) where E. is a vector of exogenous variables

affecting consumer demand (e.g., income). In principle,

then, changes in the area behind an equilibrium derived

demand curve at the exvessellevel can be used to measure

changes in consumer surplus as well as changes in producer

surplus in wholesale and retail markets given data on exvessel price and the exogenous determinants of wholesale

supply, retail supply, and consumer demand. Model (21)

now becomes

where E. substitutes for p,. Accordingly, the total change

in net national benefits (i.e., net economic value) due to

a fishery regulation is

Also, let the price linkage between markets be

Finally, substitution oflinkage (20) into demand model (19)

yields what Just et al. (1982) label the "equilibrium"

demand curve,

4Similarly, simultaneous equations estimators do not produce general

equilibrium demand (or supply) models because the original structural

identities of the ordinary market models remain unchanged.

3The change in the retail industry's surplus also can be isolated from these

results. In particular, since the total change in producer surplus (excluding, for the moment, effects on the fishing industry) is c + d =Y + v

and the change in wholesalers' surplus is c - b Y - u, the change in

the retail industry's surplus is d + b by subtraction.

causing derived demand in the exvessel market to increase to D,(p,l). Notice that D*(d, e,p,) (which is

described later as sectoral demand) connects the initial and

final equilibrium positions in the exvessel market. (Notice

also that retail price remains constant by assumption, and,

therefore, derived demand in the wholesale market does

not shift.)

What are the complete welfare implications of this

regulation and how can the change in net total economic

value be measured? As begun above with reference to

duality theory, the change in the wholesale industry's

surplus can be measured in either the wholesale or ex-vessel

markets. In the wholesale market the change is area x + y

minus area x + U, or area y - u. Equivalently, the change

measured in the ex-vessel market is area a + c minus area

a + b, or area c - b. Hence, area y - u is equal to area c - b.

This assessment is incomplete, however, until we include

the welfare changes for retailers and commercial fishermen

(and, later, consumers) imposed by reduced landings. In

Figure lOB, the change in the retail industry's surplus is

area u + v (or area z in Fig. 1OC). As a result, the total

change in producer surplus in the wholesale market is area

u + v plus area y - u, or area v + y. Finally, although the

information is not shown on Figure lOA, the change in the

commercial fishing industry's producer surplus can be

calculated as the change in total revenue due to reduced

catch minus the change in total costs due to increased travel

distance. Unfortunately, information required to estimate

a system of demand and supply curves (e.g., retail prices)

generally is lacking. Thus, from an applied perspective we

have not yet answered how to measure the total change

in net economic value caused by the fishery regulation. The

answer lies behind curve D *(d, e,P,) in the exvessel market in a manner of speaking. That is, the derived demand

curve for a hypothetical integration of wholesalers and

retailers is D*(d,e,p,) where wholesale price, Pw, adjusts

endogenously. This follows under competitive market conditions because profit maximization by the hypothetical integrated industry is equivalent to profit maximization by

the individual industries. Thus, D*(d,e,p,) takes account

of equilibrium adjustments in prices and output in related

markets. (Again, the reader is referred to Appendix D in

Just et al. [1982] for a rigorous proof.) Accordingly, area

c + d is equal to area y + v in the wholesale market (i.e.,

the net change in the wholesale and retail industries' producer surplus).3

Approaching these results from another direction will

shed some light on the theory. Let the wholesale industry's

,'ordinary" exvessel demand curve be
________________________ Edwards: Economics Guide to Allocation of Fish Stocks 29

where I1Ro is the change in the fishing industry's producer

surplus, I1So is the total change in producer surplus and

consumer surplus in wholesale and retail markets, and N

is the retail market. I1So is comprised of I1R" the change

in producer surplus for each wholesale and retail industry,

and of I1CSN , the change in consumer surplus.

Although we concentrated on a competitive vertical

market structure, Just et al. (1982) extend their theory to

market distortions, a horizontal market structure, and,

naturally, a combination of both structures. Indeed,

whether a researcher captures general equilibrium changes

in welfare depends on whether the theoretical model's

assumptions concerning necessary-inputs and pure competition are reasonably satisfied, and on whether the

appropriate set of related markets are included in the

"mini-economy." Determinants of a "mini-economy"

include prices in excluded markets (perhaps a price

index), policy instruments such as taxes, and relevant

natural, social, and political variables which shift ordinary

demand and supply. Of course, applied economists must

balance theoretical requirements of the method against

the availability of data and decide whether an adequate

assessment is possible. In specific applications, researchers

should carefully consider whether horizontally-related

markets for other inputs such as labor and for consumer

ANNB

N

I1Ro + L I1Ri + I1CSN , (23)

i-I

substitutes should be internalized.

The multi-market framework which allows one to measure welfare changes completely in a single market seems

ideally suited for fishery problems given the competition

assumptions and the necessary-input requirement. Typically, fish, shellfish, and crustaceans are processed through

vertically structured markets. Also, to a large extent, the

industry is competitively structured because of the large

number of firms in each market and because of the

availability of market information. Furthermore, given the

fishing sector's small size in relation to the national

economy, price and quantity changes probably have small

(if not negligible) effects on the rest of the economy. Also,

the supply of other inputs to the fish processing sector may

be nearly perfectly inelastic, although this would not be

the case for labor in isolated communities. Furthermore,

the multi-market framework may be the most tractable

alternative for measuring combined changes in producer

surplus and consumer surplus in the wholesale and retail

sectors. Inadequate data and severe multicollinearity

among exvessel, wholesale, and retail prices probably

preclude measuring welfare changes behind ordinary demand and supply curves; therefore, the distribution of

welfare changes could not be measured. The multimarket

framework also offers an attractive alternative to the difficult expansion of input-output analysis for the measurement of changes in producer surplus (see Hushak 1987)

whenever prices in other input markets change in response

to a fishery regulation.