Suppose the U.S. National Marine Fisheries Services (NMFS) is considering implementing one of the two policies on fishers in the Gulf of Mexico with an objective to reduce sea turtle bycatch.
Policy A: Regulation – an allowable bycatch standard (number of turtles) for each fisher. If the fisher violates the bycatch standard (i.e., ends up catching more turtles than the standard allows) at the end of the fishing season, he has to pay a lump sum fine.
Policy B: A bycatch tax on each bycatch (i.e., each turtle caught).
Let us assume NMFS has a perfect monitoring system to see how many turtles are being caught.
If Policy A is implemented, each fisher can either meet the standard by adjusting his fishing behavior. Or, he can pay the fine and harvest as much he wants to maximize his profits without worrying about sea turtle bycatch. If the fisher meets the standard, his profit is $4500 and NMFS benefit is 800 units (think of it as a benefit to society from reduced sea turtle bycatch). If the fisher chooses to pay the fine, fisher’s profit is $3000 and NMFS benefit is $500 (no benefit from reduced turtles but NMFS can use $500 for conservation efforts to protect turtles).
If Policy B is implemented, the fisher can either (i) adjust his fishing behavior, stay away from sea turtles and not pay taxes, or (ii) save on the cost of altering his fishing choices but pay taxes. In reality (from what we saw in class), fishers will typically choose to abate till the efficient level and then pay tax for the remaining amount. Abstract from this scenario for now and construct your tree using the options given to you in the problem. If fisher chooses to abate, firm profit is $3200 and NMFS benefit is $400. If the fisher chooses to pay taxes, firm profit is $3600 and NMFS’s benefit is $450.
What will be the subgame perfect Nash Equilibrium (SPNE) strategies for NMFS and fisher?
A. NMFS will choose policy A (regulation). If NMFS chooses policy A, fisher will choose to pay the fine. If NMFS chooses policy B, fisher will choose to adjust his fishing behavior.
B. NMFS will choose policy B (bycatch tax). If NMFS chooses policy A, fisher will choose to pay the fine. If NMFS chooses policy B, fisher will choose to adjust his fishing behavior.
C. NMFS will choose policy A (regulation). If NMFS chooses policy A, fisher will choose to meet the standard. If NMFS chooses policy B, fisher will choose to pay the bycatch tax.
D. NMFS will choose policy B (bycatch tax). If NMFS chooses policy A, fisher will choose to meet the standard. If NMFS chooses policy B, fisher will choose to pay the bycatch tax.
