Monday, March 09, 2009

How To Make a Problem Worse

Abdullah Waheed’s Blog HERE: carries this:

Fishermen’s Demonstration”

“From an academic point of view the results of the demonstration was spectacular. Some of the participants rediscovered the theory of supply and demand, more than 200 years after Adam Smith described it in his Wealth of Nations. "When we catch more fish the price goes down; when we catch less the price goes up," a young participant said.

Umar's main demand was to empower fishermen to set their own prices. He does have a point here. Currently the market is a buyer's market where a cartel of monopolists decides the price because they are better organized with more resources. Fishermen could get better prices if they had collective bargaining power.

On the other hand, Umar's demand for base prices of Rf 45/kg for yellow fin tuna and Rf 10/kg for skipjack may not be feasible without government subsidies. The question is can the Maldives afford more subsidies in the present economic crisis?


Comment
I found this snippet interesting. The problem is the “cartel of monopolists” which pays fishermen a price much lower than the desired price the fishermen want (presumably they can see how much their ‘yellow fin tuna’ and their ‘skipjack’ sell for at wholesalers’ cartel prices).

Their ambition is to secure, somehow, ‘collective bargaining power’, presumably by a new law or by collective action to break the cartel., and then to raise their prices to Rk 45/kg and Rf 10/kg respectively. The retail prices of the fish are not stated, but there are bound to be distribution costs and profit to be added.

If the government is to subsidise from taxation to bring the retail price down to what is currently affordable it seems this policy would open up other problems, not least of which is: to whom is the subsidy paid? The fishermen, the wholesale buyers, the consumer?

In the context of general subsidies already (‘can the Maldives afford more subsidies in the present economic crisis?’), distorting an already distorted market (the prevalence of the ‘buyers cartel’) is not a sensible policy.

Supply and demand at this level cannot be ignored. If the ‘participants’ take note of supply and demand (with or without Adam Smith’s cumbersome analytical structure) and it operates in the Maldives fishing sector, it suggests that the fishermen’s collective buying power will also rise and fall in its negotiated price, and so will government subsidies, and the retail price of fish.

The problem is caused by the buyers’ cartel and the fishermen’s submission to it.

Without knowledge of the geography of the Maldives I cannot suggest the appropriate response to implement the Smithian remedy of breaking monopoly powers on both sides of the market. But the answer lies in that area rather than in government (taxpayers’) subsidies.

As a correspondent reminds me, Adam Smith commented on the practice of subsidies and bounties for the fishing sector from government in Wealth Of Nations:

"Secondly, the bounty to the white-herring fishery is a tonnage bounty; and is proportioned to the burden of the ship, not to her diligence or success in the fishery; and it has, I am afraid, been too common for vessels to fit out for the sole purpose of catching, not the fish, but the bounty" (WN IV.a.32: p 520).

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2 Comments:

Blogger BSF said...

Gavin:

What was it that Adam Smith said about the effect of bounties to the herring fishery? that some boats were fitted out not for the purpose of catching herring but for the purpose of catching the bounty?

Brian

2:51 pm  
Blogger Gavin Kennedy said...

Thanks Brian for reminding me:

"Secondly, the bounty to the white-herring fishery is a tonnage bounty; and is proportioned to the burden of the ship, not to her diligence or success in the fishery; and it has, I am afraid, been too common for vessels to fit out for the sole purpose of catching, not the fish, but the bounty" (WN IV.a.32: p 520)

Brilliant link.

3:06 pm  

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