The Economic Way of Thinking 13th Edition by David Prychitko, Peter Boettke, Paul Heyne

Exercise 2

Some people consider the spring herring run near Sitka, Alaska, the most profitable fishing opportunity in the world. Fishing boats have occasionally netted $500,000 worth of herring in a three-hour season. It is not the herring so much as their eggs, called roe, that the fishermen are after, because of the enormous Japanese demand. The basic question: Is it really possible to earn enormous profits by fishing for a few hours in the ocean off Sitka?
(a) In order to protect the spawning herring from overexploitation, the state limits the season to a few hours and a small area, and allows only licensed boats to participate. For years the number of permits has been 52. Anyone who wants to participate must purchase a license from a current holder. The price was about $300,000. Why? What determines the going price of a license? How does this affect the profitability of herring fishing?
(b) Boat captains hire airplane spotters to increase the likelihood that they will catch some herring during the three-hour season. Spotting is a dangerous occupation, with several dozen planes crisscrossing a small area, and pilots can sometimes command $30,000 as herring spotters. Why are boat captains willing to pay such an extraordinary fee?
(c) If a licensed boat's fishing gear malfunctions, the captain may rent a bystander's boat for as much as $100,000. Why would anyone pay such an exorbitant rental fee? Why would there be any fully equipped bystanders in the area in the first place?
(d) A licensed boat may catch as much as $500,000 worth of herring. Or it may catch nothing. Estimate the annual loss of a licensed captain whose boat catches nothing.
(e) The crew's wages depend on their boat's success. Are they entrepreneurs? Are their wages really wages? Or are they profits (or losses!)?
(f) If a captain who has agreed to pay each of five crewmen 10 percent of the catch and to pay his airplane spotter 20 percent hauls in $100,000 worth of herring, has he earned a profit?