Can reserves increase profits?

Reserves (areas closed to extraction) are increasingly being adopted as a management tool. Two primary arguments are used for their implementation. The first is a biological argument that biodiversity can prosper inside the reserve. The second is that by ceasing harvest inside a reserve we may generate such a large production of individuals, that “spillover” into the harvested region will actually increase profits from harvesting even relative to optimal management in the absence of a reserve. This rationale does not immediately accord with economic intuition. We examine, in an analytical framework that is quite general, whether reserves can actually increase profits from exploitation. Over the past several decades there has been a major expansion of protected areas (“reserves”) in which extractive economic activities, such as timber harvesting, hunting or fishing, are banned or restricted. In 2005, 11% of land and 1% of the oceans are in reserve; new reserves are being added at an increasing rate. One justification for expanding reserves is to achieve biological objectives: reserves are a means to conserve biodiversity. However, sometimes a stronger claim is made that reserves increase the value of extractive economic activity; these claims are largely unsubstantiated by economic analysis. For example, in justifying marine reserves, biologists have claimed that not only is the reserve good for the fish, but it is good for the fisherman (Hastings and Botsford 1999). That this is so does not immediately accord with economic intuition. In this paper, we investigate the effect of reserves on the economic profit from harvesting. Harvesting of renewable resources, such as fisheries, involves complicated tradeoffs over space and time. Economic analyses of harvesting typically use a bioeconomic model that incorporates basic principals of biological growth within an economic framework to determine the present value derived from harvests (see e.g. Clark (1990)). For the most part, such bioeconomic models are aspatial. However, reserves involve ceasing harvesting in some places in order to expand harvests elsewhere. Spatial considerations, therefore, are of central importance. A potential confounding factor that may qualitatively change the nature of reserves is variability in the system (Conrad 1999). Therefore, our model will be a stochastic dynamic spatially explicit model. We use this model to determine the optimal spatial dynamic management of a renewable resource. One way to operationalize this spatial harvest strategy is to assign property rights either over fish or over space. There is significant debate about how zoning the oceans would work practically, and whether the public is willing to entrust resources, previously held in the public trust, to private agents. It turns out that achieving a first-best using property rights would involve a complicated coordination problem (Hansen and Libecap 2004). We will abstract away from this coordination problem and instead focus on the optimal spatial harvest from the perspective of the sole owner. This problem quickly gets complicated. The coupling of stochastic environmental conditions and life-history characteristics of harvested species introduces spatial connections between patches. Economic conditions can vary across space further complicating analysis. Despite these complications we are able to obtain sharp results. ∗Corresponding Author: Donald Bren School of Environmental Science & Management, 4410 Bren Hall, Santa Barbara, CA 93117, [email protected] †Department of Applied Economics, University of Minnesota