Question:
The village of Ectenia has ten residents. Villagers can earn income by either weaving baskets or fishing. Because the lake has a limited number of fish, the more villagers fish, the less each catches. In particular, if n households fish in the lake, the each fishing household makes an amount:
I=12-2n
where I is daily income measured in dollars. If a household decides to weave it makes $2 a day.
a.) Assume that each household makes the decision of whether to weave baskets or fish in the lake independently.
How many households do you expect to see fishing each day?
How many to weave baskets? (Hint: Think about opportunity cost.)
b.) Calculate the total income of the village in this equilibrium?
c.) Show that, when 3 households fish in the lake, the total income of the village is larger than the one you found in part (b).
What prevented the villagers from reaching this higher-income allocation of resources when they acted independently?
d.) If the villagers together decided to achieve the allocation in part (c.), what kinds of rules would the need to institute?
e.) If they wanted everyone to benefit equally in the new system, what kind of tax and transfer system would they need?
f.) What type of good is the fishery? What characteristics make it that good?