• Explains the relationship between the rate of growth and the level of population of a renewable resource, for example, fish
• The level of population depends on the extent of the harvest and the extent of the harvest depends on the level of effort and the level of effort determines the level of costs
• As long as there are profits, harvesting will continue

Example:

The maximum sustainable yield (MSY) for a given fish stock means the highest possible annual catch that can be sustained over time, by keeping the stock at the level producing maximum growth. The MSY refers to a hypothetical equilibrium state between the exploited population and the fishing activity.

• First, a contemporaneous externality which is borne by the current generations
• It involves congestion due to over-commitment of resources to fishing such as, too many boats, too many fishermen, and too much effort
• Second, an inter-generational externality which is borne by the future generations
• It occurs because over-fishing reduces the stock of fish, which in turn, lowers future profits from fishing
• The maximum sustainable yield (MSY) is defined as the largest yield one can harvest from the resource over an indefinite period.