Fishing for sablefish has been so intensive that sablefish were threatened with extinction. After several years of banning such fishing, the government is now proposing to introduce tradable vouchers, each of which entitles its holder to a catch of a certain size. Explain how uncontrolled fishing generates a negative externality and how the voucher scheme may overcome the inefficiency created by this externality.

Negative externality occurs when the production or consumption of a good causes a harmful effect on third parties who are not directly involved in the production or consumption of that good. In this case, the negative externality is caused by uncontrolled fishing of sablefish, which led to the threat of extinction. The third parties affected could be other marine life species, fishermen in the future, and consumers who rely on sablefish as a source of food.

The inefficiency created by the negative externality is that too many resources are used in fishing, leading to exceeding the sustainable fishing rate. In the absence of regulations, fishermen will not consider the long-term effects of their actions on the fish population and the ecosystem. As a result, the market equilibrium occurs at a higher quantity of fish caught than the socially optimal level, causing an inefficiency and potential depletion of the sablefish population.

The government proposes to introduce tradable vouchers, where each voucher entitles its holder to catch a certain size of sablefish. This creates a market for the right to fish, allowing the market forces to regulate the fishing activities.

Through the voucher scheme, the government sets a limit on the total amount of sablefish that can be caught. This will bring the fishing activity closer to the socially optimal level, as it accounts for the negative externality caused by overfishing. Fishermen can also trade these vouchers among themselves, allowing those who value the sablefish more to purchase additional vouchers from those who value them less. This leads to an efficient allocation of resources, as the market for tradable vouchers balances the demand and supply for the right to fish. In conclusion, introducing tradable vouchers for sablefish fishing helps to address the negative externality caused by uncontrolled fishing activities. The vouchers limit the total quantity of sablefish caught and allow for efficient allocation of fishing rights through market forces. As a result, the voucher scheme may overcome the inefficiency created by the negative externality and ultimately contribute to the sustainable management of sablefish populations.