    [From the U.S. Government Printing Office, www.gpo.gov]

              AN EVALUATION OF ALTERNATIVE STRATEGIES FOR
                  VIRGINIA OYSTER GROUNDS MANAGEMENT:
                ECONOMIC CONSIDERATIONS IN POLICY DESIGN

                              Leonard Shabman
                                Eric Thunberg

                      Department of Agricultural Economics
                                 Virginia Tech
                                  Blacksburg

                                 March, 1987

    Final Report in Partial Fulfillment of NOAA, Section 309 Project, "Development
    of an Economic Data Base for Describing Virginia's Commercial Seafood Har-
    vest Sector."

                      Project Officer: Janice Carter-Lovejoy
                      Virginia Council on the Environment

                                       COASTAL ZONE

                                   INFORMATION CENTER
     SH
     371
     .S53 '
     1987

                                            Preface

               The Commonwealth of Virginia's concern over the economic state of its
          oyster industry has resulted in an active program to define new management
          goals and strategies.  Economic analysis of alternative strategies has been
          conducted at Virginia Tech for a number of years. This report, a synthesis
          of that reseach work, was written to provide assistance to the Virginia
          Marine Resources Commission  in its continuing effort to  develop an oyster
          fishery  management plan.    The  analysis included  in  this report  draws
          heavily on a Masters thesis project completed by Eric Thunberg.   That work
          received financial support from the Virginia Sea Grant College Program,
          through the  Virginia Gaduate Marine  Sciences Consortium.   A  second work
          product included in Appendix B of this report was completed by Oral Capps
          and Leonard Shabman as a part of that same Sea Grant supported effort.

               The integration of these models, the improvement of their data base
          and the addition of auxiliary models was completed with the support of
          funds from the  NOAA 309 program administered through  the Virginia Council
          on the  Environment.   The development of  this report would not  have been
          possible without that support.

               Finally,  the development of this  report has benefited from extensive
          discussions with the VMRC staff. Their insights on both the technical data
          in the linear programming model and the general issues facing the
          Commonwealth  as  it   develops  the  oyster  management   plan  have  been
          invaluable.

                                                       U. S. DEPARTMENT OF COMMERCE NOAA
                                                      COASTAL SERVICES CENTER
                                                      2234 SOUTH HOBSON AVENUE
                                                      ChARLESTON, SC 29405-2413

    OCZ

    V-                                                        Property of  L:;c Library
    *  CO

                                             .ii-

                                   Table of Contents

           Preface..............................

           Table of Contents .........................

           List of Tables......................... v'

    I       ~~List of Figures .........................viii

    3       ~~~Section1ag

           Introduction ..1........................

           Section 1: Review of Oyster Grounds Law and Policy........2

                    Trends in Virginia Oyster Production .........2
                    Virginia's Oyster Grounds Management Apprroach ....3

           Section 2: The Oyster Industry Today: Policy Alternatives . ...  5

      U               ~~~~~The OFMP Planning Process..............           5
                    OFMP Goals and Objectves...............              5

           Section 3: Management Alternatives................7

                    Regulatory Measures.................                  8
                    Public Grounds Repletion Measures...........9

           Section 4: Overview of Oyster Fishery Economic Models    .      .....  9

      U               ~~~~~The Linear Programming Model .............10
                    The Econometric Demand System.............11
                    The Budget Simulator .................11
                    The Input/Output Model ................12
           Section 5: An Analytical Framework for Policy  Evaluation .    ...12

      I               ~~~~~Policy Variables ...................13
                    Framework Structure .....u............14
      *               ~~~~~The Policy Evaluation Procedure............14

           Section 6: Policy Simulations: Results..............17

                    Conditions Without a Management Plan .........17
                    The Baseline Condition ................19
                    A Seed Transplant Policy ...............21
                    A Seed Transplant and Seed Dredge Polcy........23
                         Seed Dredging All Areas .............23
                        Dredge or Tong Seed ...............25

                         Seed Dredging in Restricted Areas Only......25
                    Market Oyster Dredging Policy.............27
                        Market Oyster Dredging-Only ...........27
                        Dredging Market Oysters in Restricted Areas .... 29
                    Combinations of All Strategies ............31
           Section 7: Discussion of Results and Recommendations.......31

      I               ~~~~~~Competitive Production Cost..............35
                    Repletion Budget ...................37
                    Income and Access to Baylor Grounds..........37
      I             ~~~~~~Shall Requirements ..................39
                    Recommendations and Disc'uss ion ............41

           References ............................45

           Apoendix                                               Rpae

    I       ~~A. The Linear Programming Model .................49

                 Part 1: Technical Structure................51

                        Introduction ...................51

       fl                ~~~~~~The Linear Programming Model ...........52

                            The Objective Function............52
                            Model Activities...............54
                                Primary Activities ...........54
                                Secondary Activities ..........56
                                Tax Collection and Repletion Fund
                                Transfer ................60
                        Constraints....................60

                        The. Computer Model ................62

     3           ~~~~Part 2: Estimation of Technical Coefficients .......75

                        Introduction....................76

       I                 ~~~~~~~Objective Function Coefficients..........76

                            Public Grounds Repletion Costs........76
        I                   ~~~~~~~~Private Grounds Production Costs.......78
                            Oyster Harvesting Costs ...........81

       3                 ~~~~~~~Estimation of Constraint Coefficients.......83

                        Estimation of Matrix Elements...........85

                                     -iv-

    I       B. ~~Demand for Chesapeake Bay Oysters ..............89

                         General Background ................90

                         Chesapeake Bay Oyster Demand ...........92

    H       ~~C. The Budget Simulator.....................99

                         Budget Format...................100

           D. Contribution of the Oyster Industry to the Virginia
     3          ~~~~Economy and Tax Base.....................107

                         Introduction ...................108

       3                   ~~~~~~Measuring the Regional Economic Impact of
                         the Oyster Industry ...............108
       3                  ~~~~~~~Virginia's Commecial Oyster Industry.......110

                         The Multiplier Effects of Virginia's
       3                   ~~~~~~Oyster Industry .................112

                         Estimated Impacts of the Oyster Industry.       ....112

                         Future Research Needs ..............112

                         Indirect Tax Revenue from the Oyster Industry.. 113

           U~~~~~~~~~~~~V

                                 List of Tables

    Table                            Daze

    Table 1: Summary of Policies Included in Policy Scenarios ..... 18

    Table 2: Pre-OFMP Conditions .................................. 20

    Table 3: Scenario 2: The Baseline Condition An Increased
             Repletion Budget With No Change in Repletion Strategy 22

    Table 4: Scenario 3: A Seed Transplant Policy ................. 24

    Table 5: Scenario 4: Seed Transplant and Seed Dredge All
             Seed Beds ............................................ 26

    Table 6: Scenario 5: Seed Tansplant and Seed Dredge or Tong... 28

    Table 7: Scenario 6: Seed Transplant and Dredge Seed Except
             In The James River ................................... 30

    Table 8: Scenario 7: Seed Transplant and Dredge All
             Market Oysters ....................................... 32

    Table 9: Scenario 8: Seed Transplant and Harvest Market
             Market Oysters by Dredge or Tong ..................... 34

    Table 10: Scenario 9: Seed Transplant, Tong or Dredge Market
              Oysters and Dedge All Seed .......................... 36

    Table 11: Scenario 10: Seed Transplant, Dredge o Tong Market
              Oysters and Dredge or Tong Seed ...................... 38

    Table 12: Scenario 11: Seed Transplant, Dredge or Tong Market
              Oysters and Dredge Seed Except in the James ......... 40

    Table 13: Comparison of Policy Scenarios to the Baseline
              Condition ........................................... 42

    Table 14: Shell Requirements and Labor Requirements ........... 44

    Table A. 1: Description of Model River Systems ................. 53

    Table A.2: Feasible Shell-Harvest River Systems ............... 59

    Table A.3: Public and Private Growing Areas ................... 61

    Table A.4: Summary of Primary Activities ...................... 63

                                    -vi-

    Table A.5: Public Grounds Seed Areas .......................... 66

    Table A. 6: MSX Compatability by Seed Origin and Receiving
               System ............................................. 67

    Table A. 7: River System Compatability by MSX Type ............. 68

    Table A. 8: Tableau Key ........................................ 72

    Table A.9: Annual Harvest Cost Budget ......................... 82

    Table B.i: Demand Estimation: Chesapeake Bay Oyster Industry.. 96

    Table B. 2: Analytically Derived Reduced Form Equations
               for Chesapeake Bay Oyster Demand ................... 98

    Table C.1: Budget Spreadsheet Format for a Representative
               Private Grounds Planter ............................101

    Table C.2: Per Acre Returns to Fixed Costs and Management for
               a Representative Private Planter ...................102

    Table C.3: Budget Spreadsheet Format for a Representative
               Public Grounds Hand Tonger .........................103

    Table C.4: Annual Returns to Fixed Costs and Management for
               a Representative Public Grounds Hand Tonger ........104

    Table C.5: Spreadsheet Format for a Public Grounds Tonger .....105

    Table C. 6: Annual Returns to Fixed Costs and Operator Labor
                for a Representative Public Grounds Dredge
               Harvester ..........................................106

    Table D.1: Multipliers for the Virginia Seafood Industry
                from the Virginia Input-Output Model ...............114

    Table D.2: Example of Calculation of Output and Value-Added
                Effects ............................................ 115

    Table D.3: Economic Impact of the Oyster Industry .............116

    Table D.4: Virginia State Tax Revenues as a Percent of
                Gross State Product ................................117

                                     -vii-

                                  List of Figures

    Figure                                                        page

    Figure 1: Policy Evaluation Flow Diagram ..................... 15

    Figure A. 1: Model River Systems .............................. 55

    Figure A. 2: Diagram of Model Activities ...................... 57

    Figure A. 3: Cultural Technique Feasibility ................... 64

    Figure A. 4: Model Tableau .................................... 69

    Figure A.5: Fund Transfer Submatrix .......................... 71

    Figure D.1: Product Flows in the Virginia Seafood Industry ...111

                                      -viii-

                     An Evaluation of Alternative Strategies for Virginia Oyster
     I            ~ ~~~Grounds Management: Economic Considerations in Policy Design
         3                         ~~~~~~~Leonard Shabman and Eric Thunberg

             Introduction

                  Throughout its history the oyster fishery has played an important role
              inVirginia's coastal economy. Accounting for fifteen to twenty percent of
             the total value of all commercial species landed in Virginia, the oyster
             fishery is a source of income and employment for thousands of tidewater
    I      ~ ~residents (JLARC 1977).   It is because  of its importance to the tidewater
             region that the oyster industry has been a subject of law and public policy
    3        ~~since colonial times. (Santopietro, 1986).

                  Once the single largest producer of oysters in the United States, the
             Virginia oyster industry has been in a steady decline since the early
             1960's.   Public and  private concern over the  industry's decline prompted
             the State's legislature to review the condition of the oyster fishery and
             the State's role in its management.    In  response to its findings the 1984
             legislature directed the Virginia Marine Resources Commission (VMRC) to
    I      ~ ~develop and implement an oyster fishery management plan (OFMP).   The State
             set the plan's goal to maximize the biological, economic and social benefit
             from the harvest  and utilization of market oysters.   To  achieve this end
    I      ~ ~the VMRC  can employ management  alternatives that include  harvest season,
             harvest gear and entry regulations in combination with alternative public
             investment strategies (shelling and oyster seed transplanting) to enhance
    3       ~~harvestable populations.   Any alternative strategy  would have a different
             impact on the cost of producing and harvesting oysters in the State and
            upon the  VMRC budget.   The  task before the  VMRC is  to select a  mix of
    *       ~~policies that (1) satisfies the production goals of the OFMP,  (2)  remains
    *       ~~within the VMRC budget and (3)  is acceptable to the State's harvesters and
            processors. Balancing these three objectives is the management challenge.
     3           ~~~Seeking to address  this mangement challenge,  this  report provides a
             summary of a series of research projects conducted at Virginia Tech in the
             Department of Agricultural Econo mics under grants  from NOAA,  VHRC and Sea
    I      ~ ~Grant.   While each project had an independent scope and purpose,  the body
            of empirically developed models may be used in an integrative fashion to
             evaluate the VMRC's management alternatives. This integrative work was the
    3 ~~product of special funding provided through the NOAA, Section 309 program.

                 The objective of this report is to present an analytical framework
            that has been developed to evaluate the economic impacts of oyster grounds
    I      ~ ~policy alternatives  and to  draw implications for  policy design  based on
            management strategies identified in the September 1986 draft overview of
             the OFMP. This report is organized into seven sections. First an overview
    3       ~~of the oyster  industry and oyster management policies  is presented.    The
             second section discusses the current state of the oyster industry and the
            goals  and  objectives of  the  fishery  management plan.        Section  three

             I~~~~~~~~~~~~~~I

             describes the management  alternatives available to the  VMRC.   The fourth
             section provides ~an overview of oyster fishery economic research and
             describes the economic models that are used to evaluate the VMRC' s
             management options.    Section five  presents an  analytical framework  for
             evaluating the effectiveness of alternative management strategies. Section
             six identifies the management strategies to be evaluated and presents the
             results  of  the  analysis.    The  final  section  draws  conclusions  and
    3        ~~recommendations for oyster grounds policy design.

             Section _J..0: Reviw o.f Virginia Oyster Grounds Law and Policy

     I           ~~~The  Virginia oyster,   Crassostrea  virzinic-a is a  sessile  mollusk
             attaching itself  to any firm  clean substrate.    Oysters may be  found in
             intertidal zones and waters up to and sometimes exceeding 25 feet in depth.
    I      ~ ~A filter feeder,  the oyster subsists on nutrients extracted from the water
             column by passing water over its gills. The oyster's ability to select its
             food and extrude unwanted materials allows it to survive in waters carrying
             high silt and turbidity loads characteristic of estuarine environments.
             Reproduction is triggered by temperature (Kennedy and Breisch,  1981).   In
             Virginia spawning begins in early July and continues into September as long
             as Bay temperatures do not fall below 20 degrees celsius (Merritt, 1977).
    I      ~ ~Larval oysters spend  their first few weeks in a  free-swimming state until
             they settle to the bottom and attach themselves whereupon they are termed
             spat.   It  is at  this point that  the availability of  a hard  surface is
    I      ~ ~paramount.   The productivity of a river  system can be enhanced by placing
             oyster shells, the preferred material, on the growing bottom just prior to
             the spawning period.

     I           ~~~The  oyster survives  best in  estuarine  conditions where  salinities
             range between 5 and 35 parts per thousand (ppt), (Haven et. al. , 1981).
             Oyster growth is most rapid in salinities exceeding 15 ppt. Unfortunately,
    I      ~ ~salinities of  this level  are favored by  the oyster's  principal enemies:
             the disease MSX and the oyster drill (a snail-like organism).   Mortalities
             due to these two enemies are particularly high among spat and yearling
    I      ~ ~(known as seed) oysters.  In waters below 15 ppt.  in salinity, survival of
             young oysters is greatly enhanced, however, growth rates are slowed and
             oyster growth  can be  stunted due  to overcrowding.    When harvested  and
             transported to a different river system,   however,  growth resumes and the
             oyster will reach the 3 inch legal size quickly. The interesting result is
             that the oyster grounds in Virginia can be divided into two distinct types,
             those that produce large amounts of seed and undersized oysters and those
    I      ~ ~that are productive  of market oysters.   Moreover,  the  location of these
             grounds is well known and has changed little over time enabling oyster
             biologists to identify "best" management strategies for oyster production
    I      ~ ~by river system (Haven et. al. , 1981).
             Section 1.JA: Trends in Virzinia Oyster Production

      U           ~~~By today's standards market oyster production  in Virginia at the turn
             of this century was large, averaging over five million bushels per year

              1                                   ~~~~~~~~~~~~~-2-

             over the period 1890-1925 (Haven et. al. , 1981).   Although data is sketchy
             there exists sufficient evidence to suggest that oyster production prior to
             this time was even greater.   Due  to such heavy exploitation of Virginia's
             oyster resources biologists noted as early as 1881, 1910 and 1912 that the
    I      ~ ~natural oyster rocks were significantly depleted (Haven et. al. , 1981).  By
             1930 total oyster production had dipped to 1,686,914 bushels. From 1930 to
             1960 harvests were relatively stable ranging between 1.5 and 3.5 million
    I      ~ ~bushels but never  approached production levels experienced  prior to 1930.
             Over the last twenty-five years a dramatic decline in oyster production has
             occurred following the appearance of MSX disease in 1960.   M4SX,  an oyster
             disease  active in  high  salinity waters,   had  a  devastating affect  on
             privately  leased  growing  bottoms.    Additionally,   worsening  economic
             conditions throughout the 1970's forced the abandonment of Virginia's most
             productive  private  oyster  beds.    Public  grounds  harvests  were  also
    3      ~ ~adversely affected by  MSX and hurricane Agnes in 1972.    The latter event
             devastated brood stock in many of the lower salinity portions of the Bay
             fundamentally altering the level and distribution of setting in the
    I      ~ ~affected river systems.
             Section 1.2: Vir2inia's Oyster Grounds Management Anproach

     *           ~~~As a  matter of policy  Virginia maintains  a dual approach  to oyster
             grounds management. Such an approach was initiated upon the completion, in
             1896, of a survey of the State's natural oyster bottoms. The survey, known
             as the Baylor Survey, delineated naturally productive oyster rocks on the
             basis of the presence of live oysters or oyster shall.   Bottoms identified
             as being naturally productive were designated as Public grounds and as
    I      ~ ~stated in Article XI of the Constitution of Virginia:
                  The natural oyster beds, rocks and shoals in the waters of this
                  State shall not be leased, rented or sold, but shall be held in
                  trust for the benefit of the people of this State . ..
             Bottoms not so designated were made available to private individuals for
    I      ~ ~the express  purpose of oyster culture.    The practical importance  of the
             Baylor Survey was to establish the limits of the natural oyster resources
    *       ~~and the State's stewardship over them.

                  Prior to the Baylor Survey all harvesters were subject to several
             legal measures regulating the taking  of oysters.   These measures included
             gear, entry (residency, licensing and season restrictions), and harvestable
             size regulations, required the culling of live oysters from shall at the
             time of harvest, and restricted the removal of oyster shells for road
             paving and the manufacture of lime (Santopietro, 1986). I~t is important to
    I     ~ ~note that  by 1900 all of  the above harvest restrictions  were implemented
             and that the same regulations exist today in very much the same form.   The
             harvest laws apply only to watermen,   as the Chesapeake Bay harvesters are
    I     ~ ~called, working the public grounds.   The production and harvest of oysters
             on leased grounds is not subject to the above regulations.

             I                                   ~~~~~~~~~~~~~-3-

                  An additional measure employed by the State is the Oyster Repletion
    I      ~ ~Program (ORP).    Through the  application of  aquacultural techniques  the
             objective of the ORP is to influence the supply of seed and market oysters
             available for harvest. This objective is accomplished by planting shell on
             public seed beds and growing areas or transplanting seed from the James
             River to areas better suited for growth. From its authorization in 1928 to
             1960, however, it is doubtful that the ORP had any affect on harvestable
             populations as repletion effort varied greatly and little attention was
    I      ~ ~paid to  biologically optimal timing  or placement  of shell.   It  was not
             until after the appearance of MSX that repletion effort was undertaken with
             earnest, and greater care was taken to insure that shells were placed on
             bottoms most likely to receive a set of larval oysters.
                  Since 1960, the ORP has functioned as a disaster relief program and as
             an on-going oyster bed replenishment program (Baker,  1977).   In any given
             repletion season both functions are served as some repletion effort may be
             targeted  for  river   systems  experiencing  natural  disaster   (such  as
             freshwater kill due to heavy rains), while the remainder of the ORP budget
    I      ~ ~may be used in replenishment of oyster bed substrate depleted during normal
             harvesting.    The  Virginia  Marine   Resources  Commission' s  success  in
             administering the ORP to achieve its objectives is difficult to assess due
    I      ~ ~to data deficiencies.    Studies in 1977 and 1983,  however,  concluded that
             the ORP's impact was positive (JLARC, 1977;  JLARC,  1983).   In spite of a
             positive  assessment  of  the  ORP's   success  both  studies  pointed  out
    3       ~~deficiencies  in  the ORP  and  the  State's  management of  public  oyster
             grounds.

                  The 1977 JLARC report documented the decline of the oyster industry
             and cited the need to consider policy alternatives to enhance production.
             The authors concluded that production increases would be feasible, but that
             an expanded state role for management of the oyster grounds would be
    I      ~ ~required.   The  1983 JLARC study  examined several  alternative management
             strategies and simulated their impacts on oyster production through 1990.
             The authors found izhat unless current approaches to oyster grounds
             management were changed the industry would continue its current decline.
             They further concluded that even if existing harvest or leasing regulations
             were changed only small increases in oyster production could be achieved
             unless  current repletion  strategies  were  also changed.    This  finding
    I      ~ ~reveals the  interdependence of  legal and  repletion strategies  in oyster
             grounds management.   The  authors recommended that:  1)   the state modify
             existing approaches  to oyster  grounds management,   2)  the  state should
    I      ~ ~incorporate the use of economic modeling  as a fisheries management tool to
             assess the  impact of  alternative strategies,   and 3)   the state  should
             implement an oyster fishery management plan that employs the most effective
     I      ~ ~harvest  and  repletion  strategies subject  to  technical,   economic  and
             political  feasibility.   In  response to  these  recommendations the  1984
             General Assembly mandated that VMRC develop and implement such an oyster
     3       ~~management -plan.

              I                                    ~~~~~~~~~~~~-4-

    Section 2.0: The Oyster Industry Today: Policy Alternatives

         The State legislature mandate to VMRC was to develop and implement an
    OFMP and set as  its goal to maximize the biological,   economic and social
    benefit from the  harvest and utilization of the  State's oyster resources.
    The  legislature -declined,'  however,   to  make  any  recommendations  or
    provisions  as to  how  this  was to  be  done.    In meeting  the  state's
    requirement VMRC,  in  1985,  began to take steps toward  development of an
    OFMP.

    Section  .1: The OFMP Planning Process

         The development of the  OFMP has taken place in four  phases.   In the
    first phase a Fisheries Management Advisory Council (FMAC) was formed with
    members appointed by the commissioner of  VMRC.   The advisory committee is
    made up of private citizens active in and knowledgeable about the seafood
    industry.   The  Commissioner also appointed scientific  advisors including
    economists, biologists and management specialists to assist the committee.
    While VMRC has the ultimate responsibility for the plan, the purpose of the
    FMAC is to provide recommendations and citizen expertise to VMRC with
    regard to OFMP provisions, goals and strategies.

         The second phase in the plan's development was for the FMAC and VMRC
    to meet and discuss in a broad sense what the objectives of the plan should
    be.   Following  this,  VMRC  staff drafted a  management plan  with stated
    goals, objectives and proposed management options to meet the plan's goals.
    The third phase in the OFMP development process took place over the next
    several months as FMAC and VMRC met, discussed and revised the proposed
    management plan.    Currently the  OFMP is  in its  fourth phase,   that of
    evaluating the impact of alternative policies and choosing the mix of
    regulatory and repletion strategies that most effectively meets the OFMP
    goals and  objectives.   The final  phase in the  OFMP process will  be the
    finalization and actual implementation of the plan.

    Section 2.2: OFMP Goals and Objectives

         Selection of the "best" mix of management alternatives requires that
    some standards or criteria be set against which each management strategy
    may be measured or compared. In this case the appropriate standards should
    be consistent with the stated goals of the OFMP and current legislative and
    executive concerns.

        The stated goal and objectives of the OFMP are as follows:

        Goal:
             To acheive and maintain a level of Virginia's Public
         and Private ground oyster stock to generate the greatest
        possible biological, sociological and economic benefits from
        their harvest and utilization.

                                    -5-

                 Obj ectives:
    I          ~ ~~1.  By 1993,  increase public  grounds prouction to at least
                 700,000 bushels (20%  above the ten year  average).   To the
                 extent possible, reduce inter-annual fluctuations in public
    3           ~~~~product ion.

                 2. Assist private oyster producers to ensure an increase in
                 private   grounds  production   to   700,000  bushels   (the
                 approximate 20 year average) by 1995.
                 3.  Ensure  the collection of biological,   sociological and
                  economic data, as well as, fisheries statistics to monitor
                 and evaluate the effectiveness of management measures.

                 4. Implement the Marine Resource Commission's regulatory
     I          ~ ~~authority to impose effective and timely managment measures.

                 5. Support water and habitat quality standards necessary for
                 natural production. Encourage reclamation, where practical,
                 of condemned oyster grounds through VMRC cooperation with
                 the State Water Control Board and other State agencies.
                  (Source: Overview OFMP September 1986, p. 17-18)
             In  addition,   concerns  have  been expressed  with  the  legislative  and
    3       ~~executive branches of State government (JLARC, 1983) that:

                  1. The goals and objectives of the OFMP should be acheivable
     3           ~~~without undue increases in State funding requirements.

                  2. The repletion program should be self financing with no
                 unwarranted State subsidy to private planters or Baylor
     I          ~ ~~grounds harvesters.
            The objectives and concerns listed above, while not amenable to analysis as
    *      ~      ~sated,  form  the basis of a  framework within which  specific performance
             criteria may be set for evaluation of alternative management policies.

                  To cast the above objectives and concerns into a framework that is
             amenable to analysis it is necessary to establish a conceptual analytical
             approach. First, it must be recognized that is is not possible to maximize
             two or more policy goals simultaneously.    The simultaneous maximization of
             biological, socoiological and economic benefits of the oyster resource,
             therefore, is not an operational policy goal.   Instead, it is necessary to
             identify a single policy goal while setting minimum satisfactory attainment
    3       ~~levels for the remaining goals.

                  Given that the impetus behind the OFMP mandate was declining oyster
             production, it is logical that increased -oyster production be selected as
             the primary policy goal. The remaining objectives and legislative concerns
             then  become  constraints  or  conditions   under  which  increased, oyster

             3                                    ~~~~~~~~~~~~~-6-

             production is to be acheived.   Within this  context the policy goal of the
    I      ~ ~OFMP can be restated in the following general way:
                       The   State  should   seek   to  implement   management
     I          ~ ~~strategies to increase oyster harvests above their currently
                  depressed levels, subject to the following conditions.
                       i. Total production should be divided between public
     I          ~ ~~~and private grounds.

                       ii. The production goal should be attained in the least
                  costly  manner   possible,   recognizing   the  increasingly
                  competitive national oyster market.

                       iii. Repletion program expenditures should stay within
                  a predetermined annual repletion budget.
                       iv. The repletion program should be self sufficient,
                  with no unwarranted state subsidy to private planters or
                  Baylor grounds harvesters.

      I               ~~~~v.  Regulatory measures should  assure continued access
                  to the Baylor grounds for those watermen who wish to earn
                  income from oystering.
                       vi.   Regulatory  measures should  assure  watermen  an
                  income sufficient to permit their continued participation in
     *           ~~~the oyster fishery.
                  Stated in this manner a single policy goal is identified and the
             conditions under which every alternative management strategy are to meet
    I      ~ ~that goal  are clearly  defined.   Furthermore,   these policy  constraints
             derive from the goals and objectives of the OFMP and from the legislative
             concerns listed previous ly*.
             Section 3.0Q: Management Alternatives
                  The preceding discussion pointed out the specific goal and policy
    I      ~ ~constraints that are implied by the broadly stated OFMP goal.   Of the many
             management options available to VMIRC, it is unlikely that any single policy
             will be capable of satisfying all the management conditions set for the
    3      ~ ~OFMP.    Rather,  it  is likely  that a  mix of  regulatory and  management
             strategies will be required to attain OFMP goals at levels considered
           I~~~~~~~~~----------
             *Note,   however,  that  the  OFMP objectives  3,  4  and  5 are  excluded.
             Objectives 3, 4 and 5 are administrative in nature and are assumed to be
             carried out in addition to the specific management strategies that are
             implemented to meet the oyster production goal.

              I                                    ~~~~~~~~~~~~~-7-

             satisfactory by VMRC managers and industry representatives alike.

             Section 341: RegulatoryZ Measures

     3            ~~~The  policy  alternatives  from  which  VMRC  may  choose  are  either
             regulatory in nature or involve direct public investment in the oyster
             fishery.    VMRC's regulatory  options fall  into  three broad  categories,
             market oyster-harvest regulations, bottoms designation, and seed oyster
             harvest regulations.   Market oyster harvest regulations include:   minimum
             size,  open season,   gear,  quotas and restricted  entry.   These proposed
             regulations are not in themselves a departure from traditional approaches
    I      ~~to regulating the  harvest of oysters in Virginia.   The  proposed means of
             administering these regulations, however, represents a significant change
             in oyster  grounds management  policy.   In  order to  allow for  increased
    I      ~ ~management flexibility,  the  1985 Legislature granted VMRC  the regulatory
             authority to implement all harvest related restrictions as they deemed
             appropriate.    Prior   to  this  action   all  harvest   regulations  were
             legislatively set limiting VMRC's ability to respond quickly to changes in
             environmental considerations.   Today,  rather  than representing limits or
             legal  confines  within which  VMRC  must  work,   the setting  of  harvest
             regulations is an important management tool to be molded and used as
             management circumstances dictate.
                  The purpose of bottoms designation policies is to increase the
             quantity of harvestable acreage for public hand tongers or to increase the
             number of acres of growing bottom that are available for lease by private
             individuals.   QFMP provisions  propose to increase harvestable  acreage by
             opening formerly condemned public oyster beds.    In the event of shellfish
             contamination the Bureau of Shellfish Sanitation will close the affected
             bottoms to  all harvesting.   VMRC  proposals include reviews  of condemned
             oyster grounds to assess the possibility of reopening condemned oyster
    I      ~~grounds that  are no  longer contaminated.    Policies aimed  at increasing
             leasable acreage include the opening of nonproductive public grounds for
             lease and requiring proof of active cultivation on oyster grounds currently
             under lease.   The  former policy would represent a  radical departure from
    N       ~~traditional  approaches  to  oyster  grounds   management  and  would  face
             considerable  opposition  (Santopietro,   1986).   Proposed  proof  of  use
             policies  would prohibit  the nonproductive  holding  of leases,   thereby,
             either forcing the  choice between production or  abandonment.   The latter
             choice,   it is  believed,   will increase  the  number  of oyster  grounds
    3       ~~available to individuals who are willing to plant seed oysters.

                  Although,   in   principle  and  application,   seed   oyster  harvest
             regulations are similar to market oyster harvest regulations they serve at
    I      ~~least  one distinctly  different purpose.    The purpose  of proposed  seed
             harvest  regulations  is to  reduce  the  cost  of harvesting  seed.    The
             important consequence being that ORP costs would be reduced and lowered
             seed costs might attract increased investment in private oyster grounds
             production.   The most important seed  oyster harvest policy considered for
             the OFMP is permitting the use of a dredge on specifically designated seed
             I~~~~~~~~~~~~~~8

            beds.   Currently,  the only harvest gear  permitted on public grounds seed
             beds is the  hand tong.   Permitting the more  labor-efficient dredge would
            substantially reduce seed harvest costs and seed prices.

            Section 3.2: Public Grounds Reuletion Measures

                  In addition to regulatory policy measures, VMRC is also authorized to
            oversee direct public  investment in the oyster fishery,   i.e.  the oyster
            repletion program.   Although,  management policy toward administration and
            the basic aquacultural techniques used in the program are unchanged, OFMP
            provisions represent significant changes in VMRC's approach to public
    U      ~ ~grounds repletion.  The important change in oyster grounds repletion policy
             called for in the OFMP is the evaluation of alternative repletion
            techniques to identify the most cost-effective mix of repletion activities.
    I      ~ ~To  make  such  an  evaluation  possible  increased  use  of  economic  and
            biological analysis is called upon, and to support these efforts OFMP
            provisions emphasize the need for improved and expanded data collection.
             It is in these three provisions that the proposed management plan marks a
             change in ORP policy.   For the first time the utility of a formal analysis
             of the repletion program has been recognized.

    I       ~~Section 4.0O: Overview of Oyster Fishery Economic Models

                  Beginning in January 1980 and continuing through December 1985, the
    I      ~ ~Virginia Sea Grant  consortium supported a broadly  scoped fishery economic
             studies program,   focused upon the  Chesapeake Bay fisheries.    The first
             project lasted three years and was entitled "Alternative Future Directions
             for  Viginia' s In-Shore  Fishery."   One product  of  this  effort was  the
             econometric model results used to develop the oyster management planning
             recommendations of  the 1983  JLARC study.    Following from  this study  a
             second project, more clearly focused upon the oyster fishery was funded by
    I      ~ ~Sea Grant.   The study, "Evaluation of Public Policy Options for Increasing
             Virginia Commercial Oyster Harvest" was the basis for the development of
             the models  described in  Sections 4.1  - 4.4.    By 1985,   when the  OFMP
    I      ~ ~planning process was initiated these various economic models were, in large
             part,  developed.   Given the OFMP mandate  to consider economic factors in
             the plan evaluation process the potential for use of these models in the
             OFMP process seemed to be significant.   However,  a realistic appraisal of
             their usefulness identified three potential problems.
                  First, some aspects of the modeling had not yet been reviewed by
    I      ~ ~oyster management specialists.   Second, some of the model data bases could
             be made more current.   Third, the separate models had not been intergrated
             into a complete analytical system.    Therefore,  during late-1985 and 1986
    I      ~~actions were  taken to  address each of  these three  concerns.   Financial
             support for this effort was provided by VMRC and by the Virginia Council on
             the Environment through  the NOAA Section 309 program.    The structure and
             functioning of the analytical system developed under this funding is
             described in Section 5.   The separate models, (a linear programming model,
             an  econometric demand  system,   a budget  simulator  and an  input/output

             I                                   ~~~~~~~~~~~~~-9-

             model), *that comprise the system are breifly described below.   A detailed
             treatment of each of the models can be found in the technical appendices
             included in this report.

             Section 4. 1: The Linear Programminiz Model

                  The first model used in policy evaluation is a Linear Programming (LP)
             model.    LP models,   a  subset of  all  mathematical programming  models,
    I      ~ ~describe an economic  system in terms of linear  -equations.   The economic,
             biological  and  political  relationships   contained  within  the  model's
             technical  structure are  assumed  to be  linear.    LP  is a - mathematical
    3       ~~technique  that  optimizes  an  objective function  subject  to  limits  of
             resource availability  and technical  feasibility.   Specifically,   the LP
             model described here minimizes the public plus private cost of producing
             and harvesting a prespecified level of market oysters (Thunberg, 1985).
             Framed in this way the policy goal of the OFMP is captured through the
            preset harvest level and the policy constraint that the goal be attained in
             the least  costly manner  is also  incorporated.   The  model captures  the
    I      ~ ~remaining  policy considerations  by placing  restrictions  on the  model's
             ability to acheive the production goal. In a LP context these restrictions
             take the form of constraints on the model's ability to select specific
    U      ~ ~management strategies or by placing limits on the availability of resources
             that are needed in order to acheive the management goal.   For example, the
             requirement that the repletion program stay within a specified annual
            budget is modeled by placing a limit on the availability of repletion funds
             for each  repletion season.    For a  complete description  of the  model's
             activities, and constraints see Appendix A, Part 1.

     I           ~~~The technical information incorporated into the LP model is reflective
            of  specified legal  and  repletion policies  existing  as  of 1983.    The
            technical information was initially developed under a Sea Grant funded
    I      ~ ~project.   Revisions to the model were made through consultations with VMRC
            management personnel under the Section 309 funding.   A detailed discussion
            of the technical information included in the model can be found in Appendix
            A,  Part 2.   Proposed management strategies  are evaluated by altering the
            models technical information to reflect the changed management environment.
            For example, a regulatory change permitting the use of a new harvest gear
            would  alter the  cost of  harvesting  oysters.   To  examine the  economic
    1      ~ ~impacts of such a management policy the analyst must identify the magnitude
            of the change in harvest cost and then adjust the model to reflect the new
             information.    Solving  the model  yields  an  estimate  of the  cost  and
    I      ~ ~repletion  funding  savings  or  increases associated  with  the  new  gear
            regulation.   In  addition to  repletion and  cost information  the model's
            output determines tax collections and production levels by river system on
            public and private grounds. The LP model, therefore, provides quantitative
            estimates of the mix of market oyster production between public and private
            grounds, the total cost of acheiving the harvest goal, the total amount of
            repletion funding required to acheive the goal and the amount of tax that
            is collected to offset the repletion progam costs.

             *                                   -~~~~~~~~~~~~10-

    I       ~~Section 4. 2: The Econometric Demand Sy~stem

                 Using the production levels determined by the LP model associated with
    I      ~ ~a policy  change,  oyster  ex-vessel,  wholesale and  retail prices  can be
            predicted using a system of demand equations.   The demand system expresses
            oyster prices at each level of the marketing chain as a function of
            Chesapeake Day  and Gulf  State harvest,  U.  S.  consumption  of oysters,
            population, income, time trends and an index of intermediated goods and
            services.   Price changes, therefore,  can not only be forecast for changes
            in Virginia production but for changes in other factors affecting price as
            well.
                 The demand model is estimated using simultaneous equations econometric
             techniques.   The resulting individual  parameter estimates are interpreted
            as being the change in the dependent variable associated with a one unit
            change in any one independent variable holding all other independent
            variables constant.   Since changes in Virginia management policies have an
             impact only on Virginia production, prices can be forecast by multiplying
            the Virginia production regression coefficient by the new level of oyster
            harvest  while  maintaining  all  other   independent  variables  at  their
    I      ~~specified levels.   In this manner  oyster ex-vessel,  wholesale and retail
            prices are estimated.   For a detailed description of this demand model see
            Appendix B.   The new price estimates can then be applied to the production
    I      ~ ~levels determined in  the LP solution to compute  harvester,  processor and
            retailer total revenues.   While most policy  changes will likely have some
            effect on oyster prices and, therefore, on industry total revenues, in
            order to determine whether or not industry participants have been made
            better off by a policy change it is necessary to examine net revenue

    I       ~~Section 4.3: The Budget Simulator

                 The third model used in the analytical framework, a budget simulator,
    I      ~ ~is used to  evaluate changes in net  revenue due to a  policy change.   The
            budget simulator estimates changes in net revenues for a typical public
            grounds harvester and individual harvesters and private planter given
            specified relationships for each budget item.   Changes in net revenues are
            assessed by determining the impact of a proposed policy on particular
            budget items.   For example, private planter net revenue changes associated
            with policies resulting in lowered seed prices would be attained by
    I     ~ ~adjusting the seed price coefficient in the budget simulator.  Lowered seed
            prices would likely result in increased production and lowered oyster
            prices.   Adjusting the  private planter's budget to account  for the input
            and output price changes yields an estimate of net revenues for the private
            planter attributable to  the proposed policy.   Comparing the  new level of
            net revenue to net revenues that would have existed without the policy
             change provides the opportunity to determine whether or not industry
            participants are made worse off or better off because of the policy change.
            A desciption of the budget model can be found in Appendix C.

             ~~~~~~~~~~~~-II

    I        ~~Section 4.4: The Inrout/OutDut Model

                  The preceding effects, production, cost, repletion funding, price,
             total and net revenue effects relate specifically to the oyster industry
    I        ~~alone.   Recognizing  that linkages between  the oyster industry  and other
             sectors of the Virginia economy exist, it is important to consider how
             management changes within the oyster producing sector affect the Virginia
             economy as a whole.   These state-wide effects can be evaluated through the
             use of multipliers generated with an Input/Output (I/O) model.

     I           ~~~An  I/O  model  describes the  interdependencies  that  exist  between
             different sectors of an economy in terms of the purchases that are made by
             each industry from all other  industries.   Oyster harvesters purchase fuel
    I      ~ ~and materials from several other economic sectors.  These purchases in turn
             become income to the sellers of the materials which may be spent on
             purchases of seafood products or numerous other products produced in other
             sectors. The total amount of economic activity in an economy induced by an
             initial transaction in a single sector is termed a multiplier effect and
             can be  computed for  each economic sector.    Multipliers for  the seafood
             industry are available from a Virginia Input/Output model (Regional Science
    I      ~ ~Research  Institue,  1982).    Using these  multipliers it  is possible  to
             estimate changes in value-added, or addition to net State income. A second
             adjustment allows computation of indirect tax revenues.   Changes in value-
    I      ~ ~added and indirect  tax revenues indicate state-wide net  (gross sales less
             production costs)  changes in economic activity  due to a management change
             in  the  oyster industry  alone.    Indirect  tax  revenues are  useful  in
             assessing whether or not the repletion program can be made self-financing.
             For example, a change in management strategy may result in increased direct
             oyster taxes but may still not recover all costs of the repletion program.
             The collection of indirect tax revenues (tax revenues generated in sectors
    I      ~ ~other than the seafood sector)  may  be sufficient to recover the remaining
             repletion budget  deficit.   F~r  a discussion  of this  modeling work  see
    *       ~~Appendix D.

             Section 5.Q: An Analytical Framework for Policy Evaluation

                  The policy goal and constraints for the OFMP were stated in Section 2
    I      ~ ~and the management alternatives available to VM4RC to acheive that goal were
             discussed in Section 3. In the absence of any policy constraints any given
             management strategy or mix of strategies would likely be capable of
    I      ~ ~satisfying the OFMP policy goal.    However,  several policy constraints do
             exist and selection of any given management alternative would have
             different implications for the degree to which these constraints are met.
    I     ~ ~The  "best"  choice  of  specific policies  and  combinations  of  policies
             requires,  therefore,   that VMRC be able  to quantify the degree  to which
             proposed management strategies can satisfy the goal and policy constraints
             set for the OFMP.   In addition,  informed selection of policy alternatives
             requires that potential policy conflicts  be identified.   In this section,
             an  integrative  analytical  framework  based   on  the  economic  modeling

             I                                   ~~~~~~~~~~~~-12-

             described previously will be presented that is capable of accomplishing
    I      ~~this task.  First, however, what is meant by an integrative approach?

                  The  analytical  framework  is integrative  in  two  senses.    First,
    I      ~ ~economic modeling  often incorporates biological and  political information
             in addition to economic considerations.    The economic models described in
             Section 4 are integrative because they treat the oyster industry as a
    I      ~~system   in  which   limits  to   biological   feasibility  and   political
             acceptability  are  built  into the  models'  structure.       Secondly,   the
             analytical framework is itself integrative in that individual models
             interface with each other as output from one model is used as input to
    I      ~ ~other models.   The analytical framework  is integrative,  therefore,  with
             respect to the technical information incorporated into the system and with
    3        ~~respect to the economic models themselves.

                  The analytical framework employs the four economic models described in
             Section 4 to estimate the economic impact of a given management policy or
    I      ~ ~mix  of policies.    The aim  of the  framework is  to obtain  quantitative
             estimates of changes in selected policy variables due to a change in
             management strategy. Given these, the ability of each policy or policy mix
             to meet the goal and various constraints of the OFMP can be assessed and
    I      ~~policy conflicts  may be identified.    Relative performance  for different
             management  strategies can  be evaluated  and compared,   enabling VMRC  to
             identify the most effective mix of management strategies for the OFMP. The
             policy variables of interest are identified below.
             Section 5..j: Policy Variables

                  The goal of the OFMP is to increase the production of market oysters.
             The first  policy variable  of interest  is,  therefore,   the total  state
             harvest  resulting  from  any  given   management  strategy.    The  policy
             constraints of the OFMP! require estimates of several more variables.
             First, the distribution of harvest between public and private grounds must
             be estimated.    Second,  in order to satisfy the condition that the harvest
    I      ~ ~goal be attained  in the least costly  manner possible,  the total  cost of
             acheiving the harvest goal must be estimated.  Third, to determine whether,
             under any given management strategy, the repletion program can be self
              fnancing,   the ORP  funding  requirements and  the  level  of direct  and
             indirect tax collections must be estimated.   Fourth, the income effects of
             increasing harvest and changing management policies require that oyster
             prices at the ex-vessel,  wholesale and  retail level be estimated.   These
             prices can then be used to estimate changes in industry gross revenues at
             the harvest,   wholesale and retail  level and  to evaluate changes  in net
             revenues for individual Baylor grounds  tongers and private planters.   The
    I      ~ ~last  policy variable  of  interest is  the total  impact  on the  Virginia
             economy associated with increased market oyster production.

             I                                   ~~~~~~~~~~~~-13-

             Section 5.2: Framework Structure

                 The structure and flow of the analytical framework is depicted in
             Figure 1.   The policy variables that  are being evaluated are shown within
             the circles of  Figure 1.   The models  used to estimate the  impact on the
             policy variables due to a policy change are represented by triangles.   The
             policy analysis is initiated by specifying values for the choice variables
    I        ~~listed in the rectangles of Figure 1.

                  The choice variables represent either policy choices or exogenous
             factors.   The  allowable limit on repletion  spending or the level  of the
    I      ~ ~repletion tax, for example,  set the conditions under which each management
             option is to be evaluated.   The  availability of productive oyster beds or
             the level of U. S. consumption of oysters represent limits of physical
             resource  availability or  factors that  are unaffected  by the  particular
             management strategy under scrutiny.
                  Both aspects of the integrative nature of the analytical framework can
    I      ~ ~readily  be seen  in Figure  1.   Political  considerations and  biological
             realities  are  incorporated  as  choice   variables  that  place' explicit
             restrictions on the linear programming model that are then -carried
    I      ~ ~implictly through  to the  demand system  and the  budget simulator.    For
             example,   political considerations  may  require  that minimum  historical
             repletion patterns be maintained. These requirements place restrictions on
             the LP model that affect the model's results and are implicitly carried
             through the entir'e analytical system.   The relationships,  as indicated by
             the direction of the arrows, between the models of the system can be seen
             as output from the linear programming model is imposed on the demand
    I      ~ ~system.   Likewise, the demand system output is imposed on the Input/Output
             model and the Budget model.   A  final dimension included in the analytical
             framework is the qualitative evaluation of specific components of the
    I      ~ ~output to determine the feasibility of  the production levels determined in
             the policy analysis.   For example, prices may fall below that required for
             private planters or  public harvesters to operate  profitably.    Similarly,
             production levels  may exceed  available processing  capacity.   In  either
    I      ~ ~case,   the  analytical  framework  suggests the  need  to  go  beyond  the
             quantitative results of the models to offer a qualitative interpretation of
    3 ~~the results before drawing management implications.

             Section 5.2: The Policy Evaluation Procedure

                  The policy analysis begins by setting the conditions under which the
             policy is to be evaluated. Specifically, the policy goals and restrictions
             under which  the management policy  is to be  evaluated must be  set.   The
             policy goal  set for  the OFMP  is to  increase total  State harvest  to an
             annual level of 1,400,000  bushels for a period of ten  years.   This total
             harvest  is  to be  allocated  among  public  and  private grounds  in  the
             following manner:   public grounds harvest must be at least 700,000 bushels
             annually and private grounds production may not be greater than 700,000
             bushels each year.   Setting the distribution  of production in this manner

             3                                   ~~~~~~~~~~~~-14-

    Choice Variables                          Models                        Outputs                      Evaluation of Output

    Policy Choices

    VMRC Repletion Budget                                                 Production by
    Public Rocks Repletion Tax           /  ProgrammingN                  River System
    Public OFHP Policy Options                                            Public/

    Technical Coefficients                                                                               Will Private Planters Plant;
      and Constraints                                                     Pricest                       Will Public Tongers Harvest?
                                                                      Ex-Vessel             /
    Availability of Bottoms                 Demand                        Wholesale                        1. Econometric Analysis
    Productivity of Bottoms                 Systemail                                                      2. Budget Analysis
    Availability of Inputs
    Political Constraints

                                                                      Revenu
    Exogenous Variables                                                    arvest                          Processing Feasibility
                                                                      Processor
    Regional Income                                                      Retail                              Budget Analysis
    Consumption
    Maryland Harvest
    Gulf States Harvest

                                                                      State Impacts
                                                                      Value Added                    Will Consumers Purchase?
    Production Costs  Indirect Taxes
                                                                                                Pt  Econometric Demand Analysis
    Average Product  Budget
    Public Costs                            Simulat
    Private Planter Costs

                                                                     uNet Revenuel
                                                                      Public Tonger
                                                                      Private Plant

                                                 Figure It Policy Evaluation Flow Diagram

             insures that any increased State management efforts will not unduly benefit
    I      ~ ~private planters at the expense of the public grounds harvester.
                  In addition to the restrictions placed an oyster grounds production
             two conditions  are placed on the  oyster repletion program.    First river
             systems that have historically been shelled are required to continue to
             receive  a minimum  annual level  of repletion  effort.   This  requirement
             acknowledges political pressures that may exist to maintain repletion
    I      ~ ~activities in river  systems that have historically  received attention and
             insures that at least some repletion effort be expended throughout the
             Virginia portion  of the  Chesapeake Bay.    The second  condition set  for
    I      ~ ~repletion  program  is that  repletion  funding  is  set  at no  more  than
             $12,500,000 for the entire ten year planning period to be allocated on an
             annual basis as repletion conditions  require.   This condition permits the
    *        ~~flexibility to allocate the repletion budget in the most cost-effective way
             while remaining within a prespecified spending limit.

                  Procedurally,   any particular  management strategy  can be  evaluated
    I      ~ ~subject to the  above conditions in the following manner.    The values for
             the choice variables are selected and incorporated into the technical
             information of each affected economic model.   For example, a seed dredging
    I      ~ ~policy would alter the price paid for  seed.   The demand model and the I/O
             model would not be affected by this policy change but the coefficients of
             the LP model and the budget simulator would have to be adjusted to reflect
    I      ~ ~the new policy.  The policy analysis begins by using the linear programming
             model to evaluate the least cost mix of production activities that are
             required to  meet the  goal,  subject to  the, specified  constraints.   The
             results of the linear program determine total production between public and
             private grounds,   the total  cost of  acheiving the  harvest goal,   total
             repletion program costs and total repletion tax collections.   As indicated
             in Figure 1, the total production figure is then incorporated into the
             demand system to estimate ex-vessel,   wholesale and retail prices.  ,Given
             these,   gross revenues  at each  level of  the industry  can be  computed.
             Applying the multipliers   from the I/O model to the  gross revenue figures
             results in an estimate of the net value of increased State-wide economic
             market oyster harvest.     Imposing the estimated prices and  any changes in
             production costs associated with a specific management policy on the budget
             simulator results in estimated annual net revenues for a representative
             public grounds harvester and net returns per acre for a representative
    *       ~~private planter.
                  The final phase in the policy analysis is a qualitative analysis
             phase.   In this step the results of  the policy simulation are examined to
     I      ~ ~determine whether or not they seem reasonable in terms of the likely demand
             for increased oyster production, and the likelihood that sufficient labor
             will exist  to harvest the increase  in oyster production.    The following
             section provides the results of policy simulations based on this analytical
             framework for the management alternatives discussed in Section 3.

             *                                   ~~~~~~~~~~~~-16-

    Section 6.0: Policy Simulations: Results

         In this section the results of eleven possible policy scenarios are
    presented based upon the consideration of the policies and combinations of
    policies that  were discussed in  Section 3.    Table 1 provides  a tabular
    summary of  these policies.   The column  headings of Table 1  indicate the
    various policies  that are  available for  consideration.   The  row labels
    indicate the  different policy  scenarios that  were evaluated.    The cell
    entries in Table 1 indicate the scenario and policy alternatives that are
    evaluated  in that  scenario.    If an  "X"  appears in  any  row then  the
    corresponding management policy,   as indicated by the  column heading,  is
    incorporated  into that  paticular  analysis.    For example,   Scenario  6
    evaluates a management strategy that: i) limits repletion spending to a
    maximum  of $12,500,000,   ii)   uses a  repletion  strategy that  includes
    shelling oyster grounds and transplanting seed, iii) permits the taking of
    market oysters with hand tongs only and iv) permits the harvest of seed on
    all seed beds and the harvest of seed with a dredge on all seed beds except
    those  in the  James River.    For each  scenario the  basic conditions  as
    discussed in Section 5.3  were set.   In addition to these,   it is assumed
    that the mangement area concept as described in the September Draft Summary
    of the OFMP is adopted for the entire Virginia portion of the Bay and its
    tributaries (Draft OFMP Summary,  1986)  Given these initial conditions the
    economic  impacts of  each of  the  policy scenarios  were evaluated,   the
    descriptions and results of which, are presented below.

    Section 6.1: Conditions Without a Management Plan

         In this scenario the production, price and cost conditions that
    existed before the OFMP mandate were simulated. The average 1983, 1984 and
    1985  production,   repletion  budget  and tax  collections  were  used  to
    establish  the pre-OFMP  conditions.    The results  of  this scenario  are
    presented in Table 2.

         These results do not replicate the pre-OFMP conditions in any year but
    represent a composite for the 1983-1984-1985 time period.   The results can
    provide useful information for comparison with the alternative management
    strategies incorporated in the OFMP.    Under the pre-OFMP conditions total
    harvest was 641,972 bushels with 341,870 and 300,103 bushels harvested from
    public and private grounds respectively.    The predicted prices associated
    with this harvest were $0.937, $1.307 and $2.151 per pound of meat at ex-
    vessel,  wholesale  and retail respectively.*  The repletion  program spent

    *A conversion rate of 4.6684 pounds of meats per bushel was used to convert
     bushels  of  oysters  harvested  to meat  yields.    This  conversion  rate
     represents a weighted average based on reported conversion rates in the
     NMFS Fisheries Statitics of the United States and harvest levels reported
     in VMRC Annual Reports for the years 1960 to 1977 (NMFS, 1977; VMRC Annual
     Reports, 1982).

                                        -17-

                                                                           Table 1
                                                    SLummary of Policies Included in Policy Scenarios

                     Repletion Budget           Repletion Strategy                 Market Oyster                    Seed Oyster Harvest Policies
                     Spending Limit            Plant          Transplant             Harvest                  Tong            Dredge         Dredge All Areas
    Scenarios          $12,500,000               Shell          Seed             Tong               Dredge       All Areas    All Areas   Except James River

    Scenario I               NA                   X                                 X                             X
    ----------------------------------------

    Scenario 2               NA                   X                                 X                             X
    ----------------------------------------_____________________________________________________________________________________

    Scenario 3               X                    X                 X               X                             X
    ----------------------------------------_____________________________________________________________________________________

    Scenario 4               X                    X                 X               X                                               X
    ----------------------------------------_____________________________________________________________________________________

    Scenario 5               X                    X                 X               X                             X                  X

    Scenario 6               X                    X                 X               X                             X                                     X
    ----------------------------------------_____________________________________________________________________________________

    Scenario 7               X                    X                 X                                 X           X

    Scenario 8               X                    X                 X               X                 X           X
    .............................................................................................................................

    Scenario 9               X                    X                 X               X                 X                             X

    Scenario 10              X                    X                 X               X                 X           X                 X

    Scenario 11              X                    X                 X               X                 X           X                                     X
    _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

    $828,257 and tax revenues from the public grounds oyster repletion tax were
    $418,125 leaving  a budget deficit of  $410,132.   The dollar value  of the
    State-wide addition to net income (value added) associated with the oyster
    fishery under pre-OFMP conditions was estimated to be $2,359,671.70.
    Indirect tax revenues were estimated to be 11.75% of value added or
    �$277,261.34.   Under pre-OFMP  conditions,  therefore,  all but  $75,875 of
    repletion program expenditures were recovered either through direct or
    indirect sources.

         Total revenues at the harvester, processor, and retailer levels were
    estmiated to be $2,808,531,  $3,971,565  and $6,446,088 respectively.   Net
    returns to  fixed costs and  the operator  for watermen working  the public
    grounds were estimated to be $1,252.69 per year.   Private planters holding
    high productivity beds (1,500 bushels per acre) were estimated to net
    $1,502.87 per  acre per year  while planters holding  moderate productivity
    grounds (1,125 bushels per acre) earned $489.93 per acre per year and
    planters on low yielding grounds (750 bushels per acre) were estimated to
    lose $523.004 per acre per year.

         The scenario described above typifies what the condition of the oyster
    industry might be in the absence of a fishery mangement plan or any of the
    policy changes such  a plan might entail.   The  remaining scenarios assume
    the existence of an oyster fishery management plan but in each case a
    different set of management provisions incorporated in the plan is
    evaluated.

    Section k.2: The Baseline Condition

         In this scenario the effect of increasing the repletion program budget
    without any other changes in management strategy is evaluated.   Therefore,
    the repletion program  uses a  shelling-only strategy.   This scenario will
    be used as a baseline condition  because it considers no management changes
    other than  an increase in  repletion program expenditures.    Indeed,  the
    decision to  increase repletion  spending has  been made.    The management
    options considerd  in the remainder  of this  section can be  compared with
    this baseline.

         Initially a total repletion budget of $12,500,000 was given to the
    model to be allocated across the ten year planning period considered in the
    analysis. The annual harvest goal of 1,400,000 bushels, however, could not
    be attained at this repletion program funding level.   The repletion budget
    was  then increased  and the  models were  resolved.   The  results of  the
    analysis are presented in Table 3.

         Under a repletion strategy that relies on a shelling program alone the
    annual harvest goal of 1,400,000 bushels is feasible only if repletion
    program expenditures are $13,836,105 over the ten year planning horizon.
    Total harvest is 13,748,040 bushels with 8,143,138 and 5,604,402 coming
    from public and private grounds respectively.   The total cost of acheiving
    this level of production is $47,268,580.    The total cost is split between

                                       -19-

                              Table 2
                        Pre-OFMP Conditions

    Total Harvest (Bushels)                           641,972.0
         Public Harvest                              341,870.0
         Private Harvest                             300,103.0

    Repletion Budget ($)                              828,257.0
    Tax Collections ($)                              418,125.0
    Budget Deficit ($)                               410,132.0

    Prices ($/Pound)
         Ex-Vessel                                     0.93712
         Wholesale                                      1.30717
         Retail                                        2.15086

    Total Revenues ($)
         Harvester                                2,808,531.85
         Processor                                3,917,565.07
         Retailer                                 6,446,088.88

    Net Revenues ($/Year)
         Private Planter
           750 (bushels/acre/year)                     -523.00
           1125 (bushels/acre/year)                     489.93
           1500 (bushels/acre/year)                    1502.87

           Hand-Tonger                                 1252.69
           Dredger                                       NA

    Value Added                                   2,359,671.70
    Indirect Tax Revenues                           277,261.34

                                -20-

    public and private grounds in the amounts of $28,756,978 and $18,511,602
    respectively.   The predicted  prices associated with the  annual 1,400,000
    bushel harvest goal are $0.85889, $1.23894 and $2. 10822 per pound at ex-
    vessel,  wholesale and retail respectively.    These prices are below those
    which exist in the pre-OFMP situation  of Scenario 1.   Total revenues over
    the ten year period for harvesters, processors and retailers are estimated
    to be respectively, $55,124,719.60, $79,516,841.60 and $135,308,405.50, an
    increase  over pre-OFMP  conditions.   Annual  returns to  fixed costs  and
    mangement for a representative public grounds hand tonger are estimated to
    be $3,736.84, over two times the pre-OFMP figure.   This figure is based on
    the assumption that the increased harvest goal will, on average, double the
    productivity of the oyster grounds and, therefore,  double the productivity
    of the average hand tonger.   The  change in productivity more than offsets
    the reduction in prices resulting in a net increase in returns to public
    harvesters.    Net  returns  for  private planters  are  lower  under  this
    scenario, versus the pre-OFMP condition, because increased harvests result
    in lower prices received and there are no offsetting cost savings realized
    by private planters.   Planters on  high productivity grounds are estimated
    to receive net revenues of $964.03 per acre per year while moderate and low
    productivity grounds are estimated to yield net returns of $85.80 and
    -$792.42  per acre  per  year.    Over the  ten  year  planning period  the
    increased harvest goal is estimated to  result in an increase in State-wide
    net income of $47,729,529 and indirect tax collections of $5,608,219.70.
    These indirect tax collections repesent nearly 60% of the repletion budget
    deficit of 9.5 million dollars.

    Section 6.3: A Seed Transplant Policy

         The previous scenario assumed that the only repletion activity was the
    shelling of public rocks to produce market oysters.   This scenario permits
    the  transplanting  of  seed  subject   to  the  requirement  that  minimum
    historical shelling levels  are maintained.   Once these  minimum repletion
    requirements are met the choice of transplanting seed or planting shell is
    based on the relative cost-effectiveness  of each activity.   The repletion
    budget is set at a maximum of $12,500,000 to be allocated over the ten year
    planning period. The results of this scenario are presented in Table 4.

         The  total harvest  of market  oysters is  the  same as  that under  a
    shelling only repletion strategy.   With  the option of transplanting seed,
    however, the distribution of production between public and private grounds
    changes because with a seed-transplant strategy the public grounds become
    more competitive with private grounds on a cost-effectiveness basis. Under
    this strategy public grounds production increases to 9,248,037 bushels
    while private grounds production decreases to 4,500,003 bushels. The seed-
    transplant option also  allows the harvest goal to be  attained whithin the
    limits of  the repletion  budget on expenditures  of $12,050,558.    With a
    budget deficit of $7,140,125 the repletion program defecit amounts to
    $1,531,906 when indirect tax collections are considered.   Additionally the
    total public plus private cost of producing the harvest goal declines to
    $42,929,639.   The  total private grounds  cost falls to  $14,132,969 while

                                       -21-

                           Table 3
              Scenario 2: The Baseline Condition An
                 Increased Repletion Budget With No
                    Change in Repletion Strategy

    Total Harvest (Bushels)                        13,748,040.0
         Public Harvest                             8,143,138.0
         Private Harvest                            5,604,402.0

    Total Cost ($)
         Public                                    28,756,978.0
         Private                                   18,511,602.0
         Total                                     47,268,580.0

    Average Cost ($/bushel)
         Total                                           3.4382
         Public                                          3.5314
         Private                                         3.3030

    Repletion Budget ($)                           13,836,105.0
    Tax Collections ($)                             4,370,228.0
    Budget Deficit ($)                              9,465,877.0

    Prices ($/Pound)
         Ex-Vessel                                      0.85889
         Wholesale                                       1.23894
         Retail                                         2.10822

    Total Revenues ($)
         Harvester                                 55,124,719.6
         Processor                                 79,516,841.6
         Retailer                                 135,308,405.5

    Net Revenues ($/Year)
         Private Planter
           750 (bushels/acre)                           -792.42
           1125 (bushels/acre)                            85.80
           1500 (bushels/acre)                           964.03

         Hand-Tonger                                    3736.84
         Dredger                                           NA

    Value Added                                   47,729,529.00
    Indirect Tax Revenues                          5,608,219.70

                               -22-

            public grounds costs rise slightly to $28,796,670 as compared to the
            baseline condition.   The drop in private grounds costs and rise in private
            grounds costs are attributable to the change in the distribution of
            production on public and private grounds that takes place under this
            scenario,
                 The production goal is the same as that in the baseline condition.
            Since this is the case the predicted prices, total revenue figures, hand
            tonger net revenue, value added and indirect tax revenues remain the same
             for this scenario and will be the same for all the other scenarios
            considered below.   For this scenario net revenues for private planters are
    *        ~~also the same as the baseline  condition because a seed transplant strategy
            does not affect the cost or price conditions faced by private planters.

             Section 6.4.0: A Seed Trans-plant and Seed Dredge Policy

                 A policy that permits the dredging of seed is expected to result in
    3 ~~lowered seed prices resulting in increased private planting and possibly
             lowering replIetion  program costs as well.    In the recent past  all seed
             dredging policies had been vigorously opposed by watermnen and viewed with
             skepticism by  VMRC managers  as well.    Recent survey  work demonstrates,
             however, that opposition to seed dredging may be weakening among watermen
             (Santopietro, 1986).   Additionally, in public hearings held in the fall of
             1986 watermen expressed little opposition to the principle of seed dredging
    I      ~~under  certain  conditions.    Recognizing  the  biological  and  political
             concerns expressed by both management and watermen groups three alternative
             seed dredging policies are evaluated.

             Section 6. 4. 1: Seed Dredgin~ All Areas

                  In this scenario the only method of harvesting seed considered is
             dredging.    Under such  a policy  it is  assumed  that a  seed bad,   once
             harvested, would have to be reshelled before it could be expected to be
             productive again. To evaluate the effect of a seed dredge-only policy this
    3       ~~assumption  was incorporated  into the  technical structure  of the  linear
             programming model.   In  addition to this assumption,  it  was also assumed
             that a bushel of dredge seed would be less productive than a bushel of
             tonged seed.    Specifically,  it  was assumed  that it  would require  two
             bushels of dredged seed to match the productivity of a single bushel of
             tonged seed. The harvest cost per bushel for dredged seed was set at $1.00
             per bushel (twice that paid by the Potomac River Fisheries Commission in
    U      ~~1984).    Allowing seed-transplant  activities  and  setting the  repletion
             budget at $12,500,000 the results of the policy simulation are presented in
    *       ~~Table 5.

                  Under a seed dredge only policy the total cost of acheiving the
             harvest goal  is $43,990,092.   The  total private cost  increases slightly
             over that in Scenario 3 to $14,894,132 but so too does total private
             grounds production at 4,777,712 bushels.    The increase in private grounds
             production compared to Scenario 3 occurs because the reduced cost of seed

             I                                  ~~~~~~~~~~~~-23-

                            Table 4
             Scenario 3: A Seed Transplant Policy

    Total Harvest (Bushels)                          13,748,040.0
         Public Harvest                              9,248,037.0
         Private Harvest                             4,500,003.0

    Total Cost ($)
         Public                                     28,796,670.0
         Private                                    14,132,969.0
         Total                                      42,929,639.0

    Average Cost ($/bushel)
         Total                                            3.1226
         Public                                           3.1138
         Private                                          3.1406

    Repletion Budget ($)                             12,050,558.0
    Tax Collections ($)                              4,910,432.0
    Budget Deficit ($)                               7,140,125.0

    Prices ($/Pound)
         Ex-Vessel                                       0.85889
         Wholesale                                        1.23894
         Retail                                          2.10822

    Total Revenues ($)
         Harvester                                 55,124,719.64
         Processor                                 79,516,841.68
         Retailer                                 135,308,405.56

    Net Revenues ($/Year)
         Private Planter
           750 (bushels/acre)                            -792.42
           1125 (bushels/acre)                             85.80
           1500 (bushels/acre)                            964.03

         Hand-Tonger                                     3736.84
         Dredger                                           NA

    Value Added                                    47,729,529.00
    Indirect Tax Revenues                           5,608,219.70

                               -24-

            makes some private grounds relatively more  cost-effective to the next best
            public grounds production alternative.   Note, however,  the public grounds
             cost is greater in this scenario than under any previous one because of the
             assumed need to completely reshell the public grounds seed beds after each
             harvest.    This is  also reflected  in repletion  program expenditures  of
             $12,500,000 required to meet the harvest goal.

                  Private planters are made better off with a seed dredge policy because
    I      ~ ~their  production  costs are  reduced.    The  lower production  costs  are
             reflected in increased annual per acre returns of $1,249.03, $663.55 and
             $-507.42 for high,  moderate and  low productivity beds respectively.   All
             other economic impacts, prices, total revenues, tonger net revenue, value
             added and indirect tax revenues remain unchanged.

             Section 6.4.2: Scenario 5: Dredge or Tong Seed

                  Recognizing that repeated shelling for seed may be more costly than
             necessary this scenario permits the choice between dredging or tonging seed
             on a cost-effectiveness basis.   The  linear programming model was 'adjusted
             to allow either seed dredging (under the conditions described above) or
             tonging.   Areas that should be dredged and areas that should be tonged are
    I      ~~determined from  the results  of the linear  program.   In  principle,  the
             linear program makes this determination by comparing the cost per bushel of
             seed produced for all the public grounds seed beds for dredged seed and
    I      ~ ~tonged seed.  The model then selects the lowest cost combination of harvest
             gear and river system in which to produce seed subject to limits of
             technical  feasibility  and  resource   availability.    All  other  policy
             conditions remain  the same as  that for Scenario  4.   The results  of the
             analysis are presented in Table 6.
                  Permitting the choice between dredging or tonging seed reduces the
    I      ~ ~repletion cost of attaining the harvest goal.  The repletion budget deficit
             is likewise reduced and when indirect tax revenues are considered the
             repletion program is nearly self-financing with a modest budget deficit of
    I      ~ ~$271,035.   The  total public costs are  reduced as compared to  Scenario 4
             even though the distribution of public and private grounds production
             favors increased  public grounds  production.   All  other factors  prices,
             revenues,  etc.   are the same as they  were in Scenario 4 and the baseline
             condition.
             Section 6.4.3: Seed Drdedgiun in Restricted Areas Only

                  The opinions expressed at the Fall public hearings reflected the view
             that the establishment, by VMRC, of seed dredging areas in the Piankatank
    I      ~ ~and Great  Wicomico would  be acceptable  to the  watermen whereas  similar
             areas in the James would be strongly opposed.   This view has its origin in
             the fact that prior to VMRC's shelling efforts in the Piankatank and Great
             Wicomico neither of these river systems had been productive of seed. Since
             the VMRC was the agency to initiate the shelling watermen view the VMRC as
             having property rights to the seed resources that were developed there. To

             I                                   -~~~~~~~~~~~~25-

                              Table 5
              Scenario 4: Seed Transplant and Seed Dredge
                           All Seed Beds

    Total Harvest (Bushels)                          13,748,040.0
         Public Harvest                              8,970,328.0
         Private Harvest                             4,777,712.0

    Total Cost ($)
         Public                                     29,095,960.0
         Private                                    14,894,132.0
         Total                                      43,990,092.0

    Average Cost ($/bushel)
         Total                                            3.1997
         Public                                           3.2435
         Private                                          3.1174

    Repletion Budget ($)                            12,500,000.0
    Tax Collections ($)                              5,049,821.0
    Budget Deficit ($)                                7,450,179.0

    Prices ($/Pound)
         Ex-Vessel                                       0.85889
         Wholesale                                        1.23894
         Retail                                          2.10822

    Total Revenues ($)
         Harvester                                 55,124,719.64
         Processor                                 79,516,841.68
         Retailer                                 135,308,405.56

    Net Revenues ($/Year)
         Private Planter
           750 (bushels/acre)                            -507.42
           1125 (bushels/acre)                            663.55
           1500 (bushels/acre)                           1249.03

         Hand-Tonger                                     3736.84
         Dredger                                            NA

    Value Added                                    47,729,529.00
    Indirect Tax Revenues                           5,608,219.70

                               -26-

            reflect this policy environment this scenario permits the dredging of seed
            only in the Piankatank and Great Wicomico rivers while allowing seed to be
            hand tonged in all river systems.    Seed transplanting is still considered
            and the  repletion budget  remains at  $12,500,000.   The  results of  this
            scenario are presented in Table 7.
                 Under a restricted area seed dredging policy the distribution of
            production between public and private areas is the same as it was under
            Scenario 5.   This  result indicates that limiting the areas  in which seed
            oysters may be dredged does not alter the relative cost-effectiveness of
            public as opposed  to private grounds production.    Limiting seed dredging
    I      ~ ~does, however,  increase the cost of attaining the harvest goal slightly to
            $41,831,773 as compared to Scenario 5.   The repletion cost associated with
            restricting seed dredgeing is also increased over the unrestricted case.
    I      ~ ~$11,526,678.   Under this scenario, however,  public rocks oyster repletion
            tax collections increase and when combined with indirect tax collections a
            budget  deficit of  $756,718  results.   Like  the  previous two  scenarios
            prices, revenues, net returns, value added and indirect tax revenues are
            unaffected by the particular form of the seed dredging policy adopted.
    3       ~~Section 6.,2.0: Market Oyster Dredging Policy

                 The management area concept includes the possibility that market
            oysters areas may be identified and dredging of market oysters could be
    I      ~ ~permitted in specific portions of river systems  on a permanent basis or in
            response to changing resource abundance.    Existing policy does permit the
            dredging of market oysters on a limited basis in carefully designated
            regions  of  the  Day.    The following  analysis  examines  two  different
            management approaches to a market oyster dredging policy. In each case the
            dredging of seed is not permitted but seed transplanting is allowed and the
             repletion budget is set at $12,500,000 for the ten year planning period.
    I      ~ ~It is  assumed in each  case that if  a market  oyster bed is  harvested by
            dredging it will not become productive again until it is reshalled or
            reseeded. The cost per bushel of harvesting market oysters by dredging 'Was
    I     ~ ~estimated using  the budget analysis to  be $1.60.   For each  scenario the
             linear programming model was adjusted to reflect these changes.

             Section 6. 5. 1; Market Oyster Dred~in2-Onlv

                 The first market oyster dredging policy to be examined is one that
            would permit the dredging of market oysters on all oyster rocks in the
             State. The results of this scenario are presented in Table 8.
                 Under this scenario it is assumed that all market oysters harvested on
             public grounds will be harvested with  a dredge.   Permitting the taking of
            oysters with a dredge results in a greater share of total production going
            to the public grounds than under the baseline condition. The allocation of
            production is, however, identical to that determined in Scenario 3, the
             seed-transplant policy.    The total public  grounds cost of  acheiving the
            harvest goal decreases to $26,852,969 largely due to the decreased cost of

             I                                  ~~~~~~~~~~~~-27-

                            Table 6
                 Scenario 5: Seed Transplant and
                       Seed Dredge or Tong

    Total Harvest (Bushels)                         13,748,040.0
         Public Harvest                              9,248,036.0
         Private Harvest                             4,500,004.0

    Total Cost ($)
         Public                                     28,216,013.0
         Private                                    13,473,271.0
         Total                                      41,689,284.0

    Average Cost ($/bushel)
         Total                                            3.0323
         Public                                           3.0510
         Private                                          2.9940

    Repletion Budget ($)                             11,057,677.0
    Tax Collections ($)                              5,178,423.0
    Budget Deficit ($)                               5,879,254.0

    Prices ($/Pound)
         Ex-Vessel                                       0.85889
         Wholesale                                        1.23894
         Retail                                          2.10822

    Total Revenues ($)
         Harvester                                 55,124,719.64
         Processor                                 79,516,841.68
         Retailer                                 135,308,405.56

    Net Revenues ($/Year)
         Private Planter
           750 (bushels/acre)                            -507.42
           1125 (bushels/acre)                            663.55
           1500 (bushels/acre)                           1249.03

         Hand-Tonger                                     3736.84
         Dredger                                           NA

    Value Added                                    47,729,529.00
    Indirect Tax Revenues                           5,608,219.70

                               -28-

            harvesting the market oysters.   The repletion budget,  however,  is nearly
            exhausted because of the increased repletion effort required to maintain
            the productivity of the public oyster rocks.   Prices, total revenues,  net
            returns to private planting, value added and indirect tax revenues are the
    U      ~ ~same as they were for the baseline condition.  Since it is assumed that all
            harvest will be done with a dredge net returns to hand tongers is excluded
             from consideration.   Instead,   using the budget simulator  net returns to
             fixed costs and the operator of a dredge boat are estimated to be
             $21,309.52 per  year.   Private planter net  revenues are the same  as they
            were in the baseline condition because the dredging of seed is not
    *       ~~permitted in this scenario.

             Section 6.5.2: Dredgin~ Market Oysters ini Restricted Areas

                  It is doubtful that pursuit of an unrestricted dredging policy to
            harvest market oysters would be politically acceptable or biologically
             responsible.    A more  sound approach  may be  to permit  the dredging  of
             oysters in limited areas of stock abundance or in areas where the
             sustainability of natural production is questionable. Scenario 8 evaluates
             the potential impacts of implementing a limited area market oyster dredging
    I  .~policy.        The  location and acreages of  market oyster dredging  areas and
             tong areas were determined by using the results of the linear programming
             model.   As described earlier,  the linear  program selected the dredge and
             tong areas by selecting the least costly combination of river system and
    I      ~ ~harvest gear to  produce market oysters.   Table 9 presents  the results of
             the analysis for this scenario.

                  Establishing market oyster dredge areas results in a higher portion of
    I     ~ ~total harvest going to the public as  compared to the baseline condition or
             any other scenarios examined previously.   At $39,990,807 the total cost of
             attaining the market oyster production goal is lower than that of any
    I      ~ ~scenario evaluated  previously.   The  reason for this  result is  that the
             majority  of  the   public  grounds  production  is   attributable  to  the
             transplanting of seed.    It was assumed,  upon the  recommendation of VMRC
    I      ~ ~repletion officers,  that  only those areas that did not  receive a natural
             set would be  candidates to receive transplanted seed.    This condition is
             precisely that which would make a particular market oyster bad a suitable
             area for dredging.    Since the majority of the public grounds harvest comes
             from these dredged areas the total cost of acheiving the harvest goal is
             lower than it would be otherwise.

      I           ~~~Permitting the dredging of market oysters in limited areas makes those
             areas cost-effective relative to comparable  private grounds.   This result
             c an be seen as the public grounds production in this scenario is greater
    I     ~ ~than  that in  the  baseline condition  or  any  other scenario  previously
             examined.   In this scenario public grounds prodution in which oysters were
             harvested with a drege were selected over alternative private grounds
             because the harvest cost reduction afforded by the dredge policy made these
             grounds more cost-effective than would be the case if they were tonged.
             The repletion budget required to meet this public grounds production level

             I                                   ~~~~~~~~~~~~-29-

                             Table 7
            Scenario 6: Seed Transplant and Dredge Seed
                       Except In The James

    Total Harvest (Bushels)                         13,748,040.0
         Public Harvest                              9,248,045.0
         Private Harvest                             4,499,995.0

    Total Cost ($)
         Public                                     28,317,594.0
         Private                                    13,514,179.0
         Total                                      41,831,773.0

    Average Cost ($/bushel)
         Total                                            3.0427
         Public                                           3.0620
         Private                                          3.0031

    Repletion Budget ($)                            11,526,678.0
    Tax Collections ($)                              5,161,741.0
    Budget Deficit ($)                               6,364,937.0

    Prices ($/Pound)
         Ex-Vessel                                       0.85889
         Wholesale                                        1.23894
         Retail                                          2.10822

    Total Revenues ($)
         Harvester                                 55,124,719.64
         Processor                                 79,516,841.68
         Retailer                                 135,308,405.56

    Net Revenues ($/Year)
         Private Planter
           750 (bushels/acre)                            -507.42
           1125 (bushels/acre)                            663.55
           1500 (bushels/acre)                           1249.03

         Hand-Tonger                                     3736.84
         Dredger                                            NA

    Value Added                                    47,729,529.00
    Indirect Tax Revenues                           5,608,219.70

                               -30-

             falls within the prespecified spending limit of $12,500,000 but exceeds the
    I      ~ ~amount at which the repletion program  could be made self financing through
             direct  and indirect  revenue sources.    Since total  public plus  private
             grounds production is equivalent to that in the baseline condition prices,
    I      ~ ~revenues, private planter. net revenues,  value added and indirect taxes are
             the same  as that estimated  for the  baseline condition.   Net  returns to
             fixed costs and management for a representative dredger are the same as
    U      ~ ~they were in  Scenario 7.   The cost  and price conditions faced  by public
             grounds hand tongers have not changed and, therefore, estimated net returns
             for an average hand tonger are equivalent to that in the baseline
    *        ~~condition.

             Section 6.6: Combinations Of All Stratezies

     I           ~~~~The   remaining   policy  simulations   represent   three   diffferent
             combinations of  all the  individual policies  examined above.    The first
             combination permits the transplanting of seed, the dredging of market
    3        ~~oysters in  limited areas and  allows the dredjing  of seed oysters  in all
             seed areas.   The second policy combination is equivalent to the first with
             the exception that seed dredging is permitted in limited areas only as
             determined by the results of the linear programming model. The last policy
             combination is the same as the second except that seed dredging is not
             permitted in  the James  river.   The  results of  these respective  policy
             combinations are presented in Tables 10, 11 and 12.

                  Under all three policy combinations total State harvest is the same
             and, therefore, prices, revenues, value added, indirect tax revenues and
             net returns for public grounds harvesters are the same for each scenario.
             Private planter net returns are the same for all three scenarios as well,
             but net revenues are higher than in the baseline condition because of the
             availability of  dredged seed.   In scenario  9 where all seed  oysters are
    I      ~ ~harvested with a dredge total costs and rep ltion costs are higher than when
             only limited dredging is allowed.   Scenarios 10 and 11 attain very similar
             results with respect to the allocation of production between public and
    I      ~ ~private grounds,   the total  public and private  costs of  attaining their
             respective harvest levels and the repletion funding required to meet the
             harvest  goal.   Direct  tax revenues  are slightly  higher,  however,   in
    I      ~ ~Scenario 10 making it, of the three policy combinations, the one that comes
             closest to resulting in a self financing oyster repletion program.

    I .SeSction 2.0: Discussion of Results and Recommendations

                 This section will compare the results of the alternative model
             simulations.   The comparisons will be  to the pre-OFMP condition (Scenario
    I      ~ ~1)  and  the baseline  condition (Scenario 2).    Recall that  the baseline
             condition begins with a recognition that the state is committed to an
             expanded repletion program and to increasing oyster harvests as a result.
    I      ~ ~The challenge to VNRC is to utilize this increased budget authority to meet
             the goals of the stated management plan. In Section 2. 2 the goal statement
            was summarized as follows:

                             Table 8
             Scenario 7: Seed Transplant and Dredge All
                         Market Oysters

    Total Harvest (Bushels)                         13,748,040.0
         Public Harvest                              9,248,043.0
         Private Harvest                             4,499,997.0

    Total Cost ($)
         Public                                     26,852,969.0
         Private                                    14,077,380.0
         Total                                      40,930,349.0

    Average Cost ($/bushel)
         Total                                             2.9771
         Public                                           2.9036
         Private                                          3.1283

    Repletion Budget ($)                             12,467,420.0
    Tax Collections ($)                              5,029,292.0
    Budget Deficit ($)                               7,398,128.0

    Prices ($/Pound)
         Ex-Vessel                                       0.85889
         Wholesale                                        1.23894
         Retail                                          2.10822

    Total Revenues ($)
         Harvester                                 55,124,719.64
         Processor                                 79,516,841.68
         Retailer                                 135,308,405.56

    Net Revenues ($/Year)
         Private Planter
           750 (bushels/acre)                            -792.42
           1125 (bushels/acre)                             85.80
           1500 (bushels/acre)                            964.03

         Hand-Tonger                                       NA
         Dredger                                       21,309.52

    Value Added                                    47,729,529.00
    Indirect Tax Revenues                           5,608,219.70
    Value Added

                               -32-

     I               ~~~~~The   State  should   seek   to  implement   management
                 strategies to increase oyster harvests above their currently
                 depressed levels, subject to the following conditions.

                      i. Total production should be divided between public
                 and private grounds.

                      ii. The production goal should be attained in the least
                 costly  manner   possible,   recognizing   the  increasingly
    *           ~~~competitive national oyster market.

                      iii. Repletion program expenditures should stay within
    3           ~~~a predetermined annual repletion budget.

                      iv. The repletion program should be self sufficient,
                 with no unwarranted state subsidy to private planters or
                 Baylor grounds harvesters.
                      v. Regulatory measures should assure continued access
                 to the Baylor grounds for those watermen who wish to earn
                 income from oystering.
                      vi.   Regulatory  measures should  assure  watermen  an
                 income sufficient to permit their continued participation in
                 the oyster fishery.

                 The results of the model analysis give insights into the management
            approaches needed to assure attainment of these goals. The discusion which
            follows will draw upon the results reported in Section 6 and Table 13,
            which is a summary of certain results from Section 6.
                 The modeling results suggest that a 1.4 million production target is
    I      ~ ~acheivable.   However,  this target can not be acheived within the expected
            $12.5 million ten year repletion budget if the only repletion strategy is
            shelling for market  oysters.   The management strategies  which include at
    I      ~ ~least  some  seed transplanting  will  permit  the  production goal  to  be
            attained within allowed repletion program spending limits.

                 Compared with pre-OFMP conditions, any management strategy will result
            in reduced oyster prices but increased gross revenue, state economic
            activity of over $47 million for the ten year period, and indirect tax
            revenues on this economic activity of $5.6 million for the period occur
    I     ~ ~because  of  increased  harvests.    For the  individual  hand  tonger  the
            scenarios all promise increased income from oystering compared with the
            pre-OFMP condition.    This occurs despite  the price depressing  effect of
    I     ~ ~increased production.  For the private planter the same scenarios result in
            OFMP implementation making them worse off financially, compared with pre-
            OFMP conditions. This occurs in those cases where the OFMP induces a price

             I                                   ~~~~~~~~~~~~-33-

                           Table 9
      Scenario 8: Seed Transplant and Harvest Market Oysters
                       By Dredge or Tong

    Total Harvest (Bushels)                         13,748,040.0
         Public Harvest                             9,646,834.0
         Private Harvest                            4,101,206.0

    Total Cost ($)
         Public                                    27,146,840.0
         Private                                   12,843,967.0
         Total                                     39,990,807.0

    Average Cost ($/bushel)
         Total                                            2.9088
         Public                                          2.8140
         Private                                         3. 1317

    Repletion Budget ($)                            12,299,954.0
    Tax Collections ($)                             5,248,199.0
    Budget Deficit ($)                              7,051,755.0

    Prices ($/Pound)
         Ex-Vessel                                      0.85889
         Wholesale                                      1.23894
         Retail                                         2.10822

    Total Revenues ($)
         Harvester                                55,124,719.64
         Processor                                79,516,841.68
         Retailer                                135,308,405.56

    Net Revenues ($/Year)
         Private Planter
           750 (bushels/acre)                           -792.42
           1125 (bushels/acre)                            85.80
           1500 (bushels/acre)                           964.03

         Hand-Tonger                                   3,736.84
         Dredger                                      21,309.52

    Value Added                                   47,729,529.00
    Indirect Tax Revenues                          5,608,219.70

                               -34-

            depressing production increase, but does not offer offsetting reductions in
            private planting costs through seed price reductions.   Thus,  although the
            model suggests that the production goal might be acheived for any scenario
             and that a mix of private and public production is possible, the economic
             feasibility of private oyster planting is reduced from pre-OFMP conditions
             in some cases.    Specifically,  Table 13 shows  $85 per acre per  year net
             returns for the baseline condition (Scenario 2) and Scenarios 3, 7 and 8.
            Pre-OFMP returns for a planter harvesting 1125 bushels per acre were
             estimated at $490 per year.   With  the economic conditions existing in the
             oyster industy at this time it seems likely that reductions in returns to
            private oyster culture will discourage industry entrants and lead to the
    I      ~ ~exit of existing growers.   Therefore,  without further analysis it appears
             that these management approaches would not acheive the OFMP production
             goal, because of the adverse effect on the economics of private planting.
    U      ~ ~The common  characteristic of all  these scenarios  is that they  rely oaily
             upon tong harvest of seed. Only by dredge harvest, recognizing that dredge
             seed may be lower productivity per bushel and will require more frequent
             seed bed shelling, does the production goal, with respect to its private
             grounds production component, appear acheivable.   Note that dredge harvest
             need not  be in the  James River (Table  1).   Further discussion  of these
             points  is included  in sections  below.   However,   the first  management
             implication is clear.
                  Implication J1:    The OFMP must  adopt policies  which lower
     I          ~ ~~seed prices to private planters by permitting dredge harvest
                  of  seed.    The  OFMP will  directly  affect  the  economic
                  feasibility of private planting by lowering market oyster
                  prices and this can only be offset by policies to lower seed
                  prices.
             Section 7.1: Competitive Production Cost

                  The national market for oyster production is becoming increasingly
             competitive. Production from the Pacific Coast is now being added to South
    I      ~ ~Atlantic  production  as a  competitor  to  Chesapeake Bay  oysters.    One
             important aspect of a competitive advantage will be oyster prices which
             will in turn depend on cost of production.   Therefore,  the need to attain
             production targets at lowest cost is understandable. Table 13 presents the
             result that the least cost strategy is scenario 11.   Scenarios 7 and 8 run
             a close third and  fourth behind Scenarios 11 and 10.    Scenarios 7 and 8,
             however, result in substantially lowered returns to private planting (as
    I      ~ ~compared to pre-OFMP conditions) and would, as noted earlier,  be likely to
             discourage private oyster planting. Thus, scenarios 7 and 8 are acceptable
             only if the public grounds are increasingly the focus of the OFMP and the
    I      ~ ~private  planters are  allowed to  exit from  the industry.    This is  not
             consistent with the policy statement.   Scenarios 4, 5, 6, 9, 10 and 11 all
             are cost minimizing strategies which raise private planter?'s returns over
             the pre-QEMP condition. These scenarios all have the common characteristic
             of  allowing  seed  dredging.   Thus a  second  management  implication  is

             *                                 ~~~~~~~~~~~-35-

                             Table 10
            Scenario 9: Seed Transplant, Tong or Dredge
                 Market Oysters And Dredge All Seed

    Total Harvest (Bushels)                          13,748,040.0
         Public Harvest                              8,926,984.0
         Private Harvest                             4,821,056.0

    Total Cost ($)
         Public                                     28,983,169.0
         Private                                    15,035,181.0
         Total                                      44,018,350.0

    Average Cost ($/bushel)
         Total                                             3.2017
         Public                                           3.2466
         Private                                          3.1186

    Repletion Budget ($)                             12,500,000.0
    Tax Collections ($)                              5,345,782.0
    Budget Deficit ($)                               7,154,218.0

    Prices ($/Pound)
         Ex-Vessel                                       0.85889
         Wholesale                                        1.23894
         Retail                                          2.10822

    Total Revenues ($)
         Harvester                                 55,124,719.64
         Processor                                 79,516,841.68
         Retailer                                 135,308,405.56

    Net Revenues ($/Year)
         Private Planter
           750 (bushels/acre)                            -507.42
           1125 (bushels/acre)                            663.55
           1500 (bushels/acre)                           1249.03

         Hand-Tonger                                    3,736.84
         Dredger                                       21,309.52

    Value Added                                    47,729,529.00
    Indirect Tax Revenues                           5,608,219.70

                             -36-

         Implication 2:  The national competitiveness of the Virginia
        oyster industry will be enhanced if seed dredging is allowed
        and if seed transplanting is the basis for the repletion
        program for the public grounds.

    Section 7.2: Repletion Budget

        There is no scenario  that results in a zero deficit  in the repletion
    budget without consideration of indirect tax revenues.   However, Scenarios
    5, 6, 10 and 11 result in modest repletion budget deficits if indirect tax
    revenues are considered.   The characteristic that all these scenarios have
    in common is that they all include seed dredging. Given the imprecision of
    the indirect tax revenue estimates it appears that Scenarios 5, 6, 10 and
    11 all permit near full recovery  of relatively low repletion spending from
    direct and indirect tax.   However, a shelling only repletion strategy (the
    baseline condition) will result in substantial deficits.

         Implication 3:   Self sufficiency of the repletion budget is
         possible, if indirect tax revenues are considered and dredge
         seed harvest and seed transplant are part of the OFMP
         repletion strategy.

    Section 2.3: Income and Access to Baylor Grounds

         It was noted in Section 7.0 that hand tong labor benefited by
    increased  net income.    Table 13  shows this  to  be $3,736  per year  to
    operator labor and the  boat.   Also,  shown in Table 13  is the case where
    dredge harvest of oysters on public grounds offers a return to the
    harvester of $21,309 to labor and the boat. Of course the boat costs would
    be higher for the dredge operator so the difference in returns between hand
    tong and dredge effort is less than suggested by these two figures.

         These net returns figures must be evaluated in order to determine
    whether limiting the access to Baylor grounds to hand tongers will permit
    the plan  to succeed.    To assess  this,  consider  that for  the pre-OFMP
    condition public  grounds harvest was  341,870 bushels.   Assuming  that an
    average hand tonger fishes 75 days each year and harvests 10 bushels per
    day (as  included in  the cost budgets),   it would  take 331.42  full time
    tongers to harvest the 341,870 bushels.   The first two columns of Table 14
    show the number of full time hand tongers and dredgers that would be
    required to  harvest market  and seed  oysters for  each scenario.    These
    figures were computed assuming that due to the OFMP production targets the
    average hand tonger would harvest 20 bushels per day while still fishing
    for 75  days and the average  dredger would fish  for 75 days per  year and
    harvest 160 bushels of market oysters per day.   Note that only in Scenario
    7 (where all market oysters are harvested by dredge), does the annual hand
    tong labor required for the production goal fall below that of the pre-OFMP
    condition.   All other scenarios,  including Scenario 11 where the dredging
    of seed and market oysters is permitted, result in greater hand tong labor

    I                                   ~~~~~~~~~~~~-37-

                              Table 11
            Scenario 10: Seed Transplant, Dredge or Tong
               Market Oysters and Dredge or Tong Seed

    Total Harvest (Bushels)                           13,748,040.0
          Public Harvest                              9,248,044.0
          Private Harvest                             4,499,996.0

     Total Cost ($)
          Public                                     28,216,012.0
          Private                                    13,473,271.0
          Total                                      41,689,283.0

     Average Cost ($/bushel)
          Total                                            3.0323
          Public                                           3.0510
          Private                                          2.9940

     Repletion Budget ($)                             11,410,809.0
     Tax Collections ($)                              5,350,003.0
     Budget Deficit ($)                               6,060,806.0

     Prices ($/Pound)
          Ex-Vessel                                       0.85889
          Wholesale                                        1.23894
          Retail                                          2.10822

     Total Revenues ($)
          Harvester                                 55,124,719.64
          Processor                                 79,516,841.68
          Retailer                                 135,308,405.56

     Net Revenues ($/Year)
          Private Planter
            750 (bushels/acre)                            -507.42
            1125 (bushels/acre)                            663.55
            1500 (bushels/acre)                           1249.03

          Hand-Tonger                                    3,736.84
          Dredger                                       21,309.52

     Value Added                                    47,729,529.00
     Indirect Tax Revenues                           5,608,219.70

                                -38-

    demand than the pre-OFMP condition.    However,  opportunity costs of labor
    and changing seashore community structure suggests that few new persons
    will enter the hand tong fishery  (Santopietro,  1986).   It seems unlikely
    that the additional numbers needed to harvest 1,400,000 bushels will be
    found with the modest increase in returns for hand tong market oyster
    harvest.

         Alternatively, if some dredge harvest were permitted the increase in
    hand tong labor  required to harvest the production goal  would be reduced.
    For example,   in the baseline condition  it would require a  near doubling
    over pre-OFMP levels of the number of hand tongers needed to harvest the
    public grounds production that would occur  under the management plan.   It
    is only when managed dredging of market oysters is considered that the
    numbers of hand tongers required to harvest the public grounds production
    seem feasible given the  lack of entry into the tong  labor force,  and the
    modest increase in returns to hand  tongers.   Note that the scenarios that
    include managed dreging of the public grounds (7, 8, 9, 10 and 11), with
    the exception  of Scenario 7,   compare favorably  with the number  of hand
    tongers in the pre-OFMP scenario (Scenario 1) suggesting that few persons
    would  be replaced  with  a dredge  policy.    As  oyster production  grows
    increased use of dredge harvest could be permitted.   Indeed, it seems that
    without dredge harvest of market oysters the production goals cannot be
    met.

         Implication 4:    It is possible  to meet  production goals,
         maintain access to Baylors and assure adequate income to
         harvesters only by permitting a mixed strategy of hand tong
         and managed dredge harvest of market oysters on the Baylor
         grounds.

    Section 7.4: Shell Reauirements

         Given the relative difficulty VMRC has had with obtaining sufficient
    shell supplies for its current repletion activities it is important to
    assess the shell requirements for each scenario.  Table 14 lists the amount
    of shell that would be required in order to meet the harvest goal.   In the
    pre-OFMP condition  (Scenario 1)   1,661,194 bushels  of oyster  shell were
    planted.   On  a ten  year basis  this level  of shelling  would amount  to
    16,611,940  bushels.    If  pre-OFMP repletion  strategies  are  maintained
    (Scenario 2) a shelling-only strategy would require 36,338,287 bushels of
    oyster  shell over  the ten  year period,   more than  double the  pre-OFMP
    amount.   It  seems unlikely that  such a  shelling level can  be sustained
    given limited access to house shell and uncertain quantities of reef shell.
    Only Scenarios 5, 6, 7, 8, 10 and 11 call for shell quantities that are
    reasonably close to that used in the pre-OFMP condition.  At a minimum each
    of these scenarios calls for a repletion program heavily oriented toward
    the transplanting of seed.

                                     -39-

                              Table 12
           Scenario 11: Seed Transplant, Dredge or Tong
         Market Oysters and Dredge Seed Except in The James

    Total Harvest (Bushels)                          13,748,040.0
         Public Harvest                              9,248,036.0
         Private Harvest                             4,500,004.0

    Total Cost ($)
         Public                                     28,347,624.0
         Private                                    13,502,133.0
         Total                                      41,849,757.0

    Average Cost ($/bushel)
         Total                                             3.0440
         Public                                           3.0652
         Private                                          3.0004

    Repletion Budget ($)                             11,563,183.0
    Tax Collections ($)                              5,282,057.0
    Budget Deficit ($)                               6,281,126.0

    Prices ($/Pound)
         Ex-Vessel                                       0.85889
         Wholesale                                        1.23894
         Retail                                          2.10822

    Total Revenues ($)
         Harvester                                 55,124,719.64
         Processor                                 79,516,841.68
         Retailer                                 135,308,405.56

    Net Revenues ($/Year)
         Private Planter
           750 (bushels/acre)                            -507.42
            1125 (bushels/acre)                            663.55
            1500 (bushels/acre)                           1249.03

         Hand-Tonger                                    3,736.84
         Dredger                                       21,309.52

    Value Added                                    47,729,529.00
    Indirect Tax Revenues                           5,608,219.70

                             -40-

                  Implication  5:   Given  the limited  availability of  house
                 shell and uncertain supplies of reef shell, only a repletion
                 strategy that, at a minimum, emphasizes transplanting seed
                 will be capable of meeting and sustaining the production
                 goal set for the OFMP.
             Section 7.5: Recommendations and Discussion

     I           ~~~Only Scenarios  10 and 11 are  capable of meeting the  multiplicity of
             goals set  for the OFMP.    The management characteristics  associated with
             these  scenarios  are  that  all   repletion  strategies  and  all  harvest
    I      ~ ~strategies are possible.  Because of the political sensitivity of the issue
             of seed dredging in the James, Scenario 11 which does not permit dredging
             the James River seed beds would be favored.

                 The general outline of a management plan following Scenario 11 and
             drawing upon the results of the model can be described.   First,  in 11 the
             repletion program concentrates its activities on shelling for a set in good
             seed areas and then harvesting seed by dredge in all areas except the James
             for grow out in other areas.   Seed  areas that might be considered are the
             Piankatank and  Great Wicomico  Rivers.   Once  transplanted market  oyster
             harvest would be by dredge. Tong harvest would be reserved for those areas
             that are shelled to receive a natural set for market oyster production.
             The number of dredge operators for both seed and market oysters would be
    I      ~ ~limited.    One means  of limiting  numbers could  include giving  dredging
             rights to holders of hand tong licenses who would then dredge or sell their
             right to others who wish to dredge. Other possibilities could be explored.
             Associated with this strategy is the fact that seed prices would be
             lowered, encouraging more private planting.
                  This management strategy is realistic in that it results in a
             technically attainable goal and is consistent with the economic realities
             that can keep the Virginia harvest sector and private planter competitive
             with other oyster producing regions.   In  this regard,  it is important to
             note that the final model structure has been formed to favor tong harvest
             of seed and market oysters.   As a  result the fact that dredge activity is
             still suggested is that much more significant. The primary examples of the
    *       ~~intentional bias toward tong harvest are the following:

                  1.   Seed  bed  shelling requirements:    For  tong  harvest
                  shelling is assumed to be required only once every four
     I         ~ ~~years.   Setting success only declines  10% per year between
                  shelling.   For  dredge harvest  shelling is  assumed to  be
                  required every year.    Setting success goes to  zero if not
                  reshelled.
                  2.  Productivity of Seed:   Tong seed is assumed to be twice
                  as productive 'of market oysters as is dredge seed. In other
                  words, spat count per bushel is one half that of tong seed.

             I                                  ~~~~~~~~~~~~-41-

                                                                             Table 13
                                                    Comparison of Policy Scenarios to the Baseline Condition

                                                                   Repletion Budget Deficit        Public Grounds              Private Planter
                             Average Total       Repletion       N/O Indirect    WV Indirect         Net Revenues               Net Revenues
             Scenarios      Cost per Bushel      Budget          Taxes            Taxes          Tonger        Dredge        (1125 Bushels/Acre)

             Baseline           3.4382           13,836,105       9,465,229       3,857,080      3,736.84       NA                85.80

             Scenario 3          3.1226          12,050,558       7,140,125       1,531,906      3,736.84       NA                85.80

             Scenario 4          3.1997          12,500,000       7,450,179       1,841,960      3,736.84       NA               663.55

             Scenario 5          3.0323          11,057,677       5,879,254         271,035      3,736.84        NA              663.55
    '3
             Scenario 6          3.0427          11,526,678       6,364,937         756,718      3,736.84       NA               663.55

             Scenario 7          2.9771          12,467,420       7,398,127       1,798,908         NA          21,309            85.80

             Scenario 8          2.9088          12,299,954       7,051,755       1,443,536      3,736.84       21,309            85.80

             Scenario 9          3.0880          12,500,000       7,154,218       1,545,999      3,736.84       21,309           663.55

             Scenario 10         2.9055          11,410,809       6,060,806         452,587      3,736.84       21,309           663.55

             Scenario 11         2.8653          11,563,183       6,281,126         672,907      3,736.84       21,309           663.55

                  Logic suggests that these are extreme assumptions.   To illustrate, if
             it is the case that shelling for dredging occurred every four years and if
             it was assumed that productivity declined 50% (as distinct from the extreme
             model assumption of the need to reshell yearly) the model would always
             choose dredge  over tong  harvest.   Thus,   even this  radical decline  in
             setting rates (50%) on dredged beds relative to the tonged beds (10%) still
             favors dredging.

     I           ~~~The productivity of seed also was biased toward tonging.  To recognize
             this,  assume a spat count of 600-800  per bushel for hand tong seed.   The
             model assumes  a spat  count of  300-400 for  dredge seed.    However,  the
    I      ~ ~Potomac River Fisheries Commission has permitted the dredge harvest of seed
             for a number of years.   Their spat counts per bushel were 477, 514 and 503
    3       ~~for 1982, 1983 and 1984 respectively.

                  Taken together modest, and probably defensible, adjustments to seed
             bed shelling requirements and seed productivity for tong vs. dredge harvest
             would tilt the model solution entirely toward dredge harvest of seed.   The
             effects would be to (1) reduce average costs below those shown in Table 13,
             (2) reduce the repletion budget and repletion budget deficits shown in
             Table 13, (3) enhance the access to and income potential from the Baylor
             grounds and (4) enhance the returns to private planting shown in Table 13.
                  The results of the models developed for this work can only be a guide
             to change.   Any  change which is instituted  will come slowly and  must be
             carefully monitored. However, change is needed if there is to be increased
             oyster production, a labor force that is willing to harvest the oysters and
             a private sector that is willing to invest in oyster planting. In summary,
             the needed changes are:
                  (1) A repletion program emphasis on seed transplant..

                  (2)   A program  for  managed dredging  of  seed and  market
     3           ~~~~oysters.

             The alternative is the continued decline of the industry as labor and
             capital resources leave the sector and as other areas capture Virginia's
    3       ~~oyster market.

             I                                  ~~~~~~~~~~~~-43-

                                                                   Table 14
                                                 Shall Requirements and Labor Requirements

               Annual       Annual        Tonged      Dredged      Tonged        Public       Private
               Tong         Dedge         Seed        Seed         Market        Market       Market      Shells
    Scenario   Harvesters   Harvesters   Oysters      Oysters       Oysters      Oysters      Oyster      Planted
              Ifull time)  (full time)   (bushels)   Ibushels)    (bushels)   (bushels)   (bushels)   (bushels)

      1        331.42                                                 341,87      0.0          300,103    1,661,194

      2        642.43        25.01        2,986,596      0.0        8,143,13      0.0        5,604,902   36,338,287

     3        712.01         46.71       2,864,140       0.0       9,248,03       0.0       4,500,003   21,057,255

     4        616.54        37.50          0.0       5,646,569    8,970,32       0.0        4,777,712   22,399,938

     5        684.35        63.34        2,304,281   3,509,766    9,248,03       0.0        4,500,004   16,951,666

      6        706.18        52.12        2,689,511   2,687,674    9,248,04       0.0        4,499,995   15,426,108

      7        148.42        48.70        4,452t706      0.0           0.0      9,248,043   4,499,997   13,770,270

      8        492.11       114.57        4,247,813      0.0        5,257,734   4,389,099   4,101,206   13,379,659

      9        350.62        70.75          0.0       8,641,326    5,259,293   3,703,999   4,784,742   22,353,055

      10       414.04        87.10        1,848,154   4,131,721    5,286,534   4,217,498   4,244,010   17,475,537

      11       439.41        82.10        2,702,734   2,688,914    5,239,784   4,246,099   4,262,157   15,430,812

                                   References

    Bailey, R. S. and F. C. Biggs, Let's Be Oyster Farmers. Virginia Institute
         of Marine Sciences. Gloucester Point, Virginia. 1968.

    Baker, Samuel H., Frederick H.  Harris and Carlisle E.  Moody.   A Benefit-
         Cost  Analaysis of  the  Virginia  Oyster Subsidies:    An  Historical
        Appraisal and  Proposals for  the Future.    Department of  Economics,
         College of William  and Mary.  Williamsburg,  Virginia.   December 23,
         1977.

    Belongia,  M.   "Application of Ridge  Regression with Verification  of New
         Procedures." Aricultural Economics Research. 31:36-39. 1979.

    Belsley,  D.   A.,  E.  Kuh and  R.  W.  Welsch.    Regression Diagnostics:
         Identifivin2 Influential Data and Sources of Collinearitv. John Wiley
         and Sons. New York, New York. 1980.

    Brown,  W.  G.  "Effect of Omitting  Relevant Variables Versus Use of Ridge
         Regression  in  Economic Research."   Oregon  Akricultural  Experiment
         Station Special Report 394.  Corvallis, Oregon. 1973.

    Brown, W. G. and B. R. Beattie. "Improving Estimates of Economic Parameters
         by Use of Ridge Regression with Poduction Function Application."
         American Journal of Azricultural Economics 57:21-32. 1975.

    Campbell, D. W., and R. H. Forste.   The Biological and Economic Aspects of
         Oyster Propogation in Maryland.   Mayland Dep.   Nat.  Res.  (no.  FA-
         MRR-78-2). Annapolis, Maryland. 1978.

    Capps, O., Jr. "Treatment of Multicollinearity in Simultaneous Systems of
         Linea  Equations." Staff  Paper SP-82-1,   Department of  Agricultural
         Economics,   Virginia  Polytechnic  Institute  and  State  University,
         Blacksburg, Virginia. 1982.

    Cox, Robert W. "Virginia Annual Gross State Product, 1958-1985." Tayloe
         Murphy Institute, University of Virginia, Charlottesville, Virginia.
         December, 1986.

    Durbin,  J.   "Testing for  Serial Correlation  in Systems  of Simultaneous
         Regression Equations."  Biometrica 370-377. 1957.

    Fishery Statistics  of the United  States.   U.S.  Department  of Commerce,
         National Marine Fisheries Service, Washington D. C. 1950-1976.

    Fox, K. The Analysis of Demand for Farm Products. USDA Technical Bulletin
         No. 1081. 1953.

                                       -45-

    Gardner, B.  L.   "The Farm-Retail  Price  Spread in  a Competetive  Food
         Industry."   American Journal  of  Azricultural Economics  57:399-409.
         1975.

    Haven, Dexter S., W. J. Hargis and P. C.  Kendall.   The Oyster Industry of
         Virginia:  It's  Status;  Problems and Promise,   Virginia.   Virginia
         Institute of Marine Sciences Special Papers on Marine Science No. 4.
         Gloucester Point, Virginia. April 1981.

    Haven,  Dexter S.,  J.  P.  Whitcomb and P.  C.  Kendall.   The Present and
         Potential Productivity of  the Baylor Grounds in  Virginia.   Virginia
         Inst. Mar. Sci.  Mar.  Sci.  and Ocean Eng.  (no.  243).   Vol.  I&II.
         Glocester Point, Virginia. May 1981.

    Heien,  D.  M.  "Markup  Pricing in a Dynamic Model of  the Food Industry."
         American Journal of Agricultural Economics. 62:10-18. 1980.

    Hoerl,  A.  E.   and R.  W.  Kennard.  "Ridge  Regression:  Applications to
         Nonorthogonal Problems." Technometrics 12:69-82. 1970

    Joint Legislative Audit and Review  Commission.   Program Evaluation Marine
         Resource Management Programs in Virginia.   Richmond,  Virginia.  June
         1977.

             .   The  Economic Potential and  Management of  Virginia's Seafood
         Industry. House Document No. 2. Commonwealth of Virginia. Richmond.
         1984.

    Kennedy, Victor S.  and L.  L.  Breisch.   Maryland's Oysters: Research and
         Management.   Maryland Sea Grant Pub.  (no.  UM-SG-TS-81-04).  College
         Park, Maryland. 1981.

    Maasoumi,   E.   "A  Ridge-Like  Method   for  Simultaneous  Estimation  of
         Simultaneous Equations."  Journal gof Econometrics 12:161-176. 1980.

    Malinvaud,  E.    Statistical Methods of  Econometrics.   Rand  McNally and
         Company, Chicago, Illinois. 1970.

    Merritt,  Donald  W..   Oyster Spat Set on Natural Cultch in  the Maryland
         Portion of the  Chesapeake Bay.   UMCEES Special Report  No.  7.  Horn
         Point Environmental Laboratories.  Cambridge, Maryland. Feb. 1977.

    Moscardi, E. and A. de Janvry. "Attitudes Toward Risk Among Peasants: An
         Econometric  Approach."  American  Journal  of Aericultural  Economics
         59:710-716. 1977.

    Regional  Science  Research  Institute.   Basic  Regional  Input-Ouput  for
         Transportation Ipact Analysis: Handbook .1. Regional Science Research
         Institute, Amherst, Massachusetts. July, 1982.

                                       -46-

    Santopietro,  George  D..   The Evolution of  Property Rights to  a Natural
        Resources:   the Oyster Grounds of the Chesapeake Bay.   Department of
        Agricultural Economics, Virginia Tech, Blacksburg, Virginia. May 1986.
         (Unpublished Dissertation).

    Shabman,  Leonard A.   and Oral J.  Capps.   Econometric  Demand and Supply
        Models of Selected Chesapekae Bay Seafood Products: Report 1: Oysters.
        Department  of Agricultural  Economics,   Virginia Tech,   Blacksburg,
        Virginia. 1986. (Unpublished Working Paper).

    Shabman,  Leonard A.  and Thomas  Johnson.   Contribution of the Commercial
         Seafood Industry to  the Virginia Economy:  A  Preliminary Assessment.
        Department  of  Agricultural  Economics  Virginia  Tech,   Blacksburg,
         Virginia. October, 1986. (Unpublished Staff Paper #SP-82-8).

    Shellfish Market Review.    U.S.  Department of Commerce,   National Marine
        Fisheries Service, Washington, D. C. 1981.

    Thunberg,  Eric.   A  Decision Model to Evaluate  the Cost-Effectiveness of
         Alternative Virginia Oyster Grounds Management Strategies. Department
         of Agricultural Economics Virginia Tech, Blacksburg, Virginia. 1985.
         (Unpublished Thesis).

    Vinod, H. D. "Application of New Ridge Regression Methods to a Study of
         Bell Systems  Scale Economics." Journal  of the  American Statistical
         Association 71:835-841. 1976.

    Vinod, H. D. and A. Ullah.  Recent Advances in Regression Methods.   Marcel
         Dekker, Inc., New York, New York. 1982.

    Virginia Marine  Resources Commission.   Laws  of Virginia Relating  to the
         Marine Resources of the Commonwealth. Newport News, Virrginia. 1980.

    Virginia Marine Resources Commission. Annual Reports for 1981 and 1982.
         Newport News, Virginia. 1982.

    Viginia Marine Resources  Commission.   An Overview of  the  Virginia Oyster
         Fishery  Management Plan.    Fisheries Plans  and Statistics  Section,
         Fisheries Management Division, Virginia Marine Resources Commission.
         Newport News, Virginia. 1986. (Unpublished Draft)

                                       -47-

    Watson, D. E. and K. J. White. "Forecasting the Demand for Money Under
        Changing Term Structure of Interest Rates: An application of Ridge
        Regression. if Southern Economic Journal 43:1096-1105. 1976.

    Waugh, F. V. Demand and Price Analysis. Technical Bulletin No. 1316, U.S.
        Department of Agriculture, Economic Research Service, ESAD. 1964.

                                      .-48-

    l
    I
    I
    I

            ~~~~~~~I    ~~Appendix A
          I*~~~~ ~~The Linear Programming Model

    I
    I
    I
    I
    I
    I
    I
    I
    I
    I
    I
    I                                                -49-
    I

                                   Appendix A

                          The Linear Programming Model

        Appendix A is split up into two parts.   Part one provides a technical
    description of a linear programming model that was developed under Sea
    Grant  funding.   Part  two  of Appendix  A presents  a  discussion of  the
    technical infomation incorporated into the models described in Part 1. For
    more information,   a complete description  of all  aspects of the  model a
    Master's Thesis  eiititled,   "A  Decision  Model   to  Evaluate  the  Cost-
    Effectiveness  of   Alternative  Oyster  Grounds   Management Strategies,"
    (Thunberg, 1985) should be consulted.

                                       -50-

                                        Appendix A, Part I

       I                  ~~~~~The Linear Programming Model: Technical Structure

    I       ~~Section .1.0: Introduction

                  The Virginia Marine Resources Commission (VMRC) is responsible for the
    I      ~~management  of all  oyster bottoms  within  the State's  domain.   VMRC  is
             charged with the administration of the Oyster Repletion Program (ORP) and
             the formulation and enforcement of policies and regulations governing the
             production and harvest  of oysters on public and private  oyster beds.   In
             attempting to achieve repletion and total State market oyster production
             goals VMRC must allocate limited resources over time among alternative
             aquacultural practices and river systems.   In addition, VMRC must evaluate
             and recommend regulations on harvest of seed and market oysters.
                  These resource allocation and policy decisions should provide for the
             attainment of oyster production goals at minimum cost to public and private
             interests over time.   VMRC's repletion activities and policies affect both
             public and private  costs of producing market  oysters.   VMRC,  therefore,
             should concern itself not only with the costs of administering and
             conducting its activities, but also how its actions affect the cost to
             private individuals harvesting oysters on public grounds or producing
             market oysters on  leased bottoms.   The decision problem faced  by VMRC is
    I      ~~one  of  minimizing  costs  over  time  subject  to,   limits  of  resource
             availability, market oyster production potential, and the range of policy
             options available.   Linear Programming (LP) is a mathematical optimization
    I      ~~technique  that can  be  used  to determine  an  optimal  solution to  this
             decision problem.

                  A multi-period LP model permits the simultaneous consideration of many
    I     ~ ~different repletion and  policy alternatives while recognizing  that VMRC' s
             decisions take  place over  time.   In  addition to  being an  optimization
             technique, LP provides useful information pertaining to shadow prices for
             included constraints,   and the  sensitivity of  the model's  solution with
             respect to changes in objective function or constraint coefficients.

                  Within a linear programming framework,   VMRC's management problem may
             be stated in the following way.   The  VMRC has limited funds for repletion
             purposes, ie.  planting shell or seed.   VMRC may also choose to substitute
             repletion activities with policy changes designed to increase market oyster
             harvest such as, permitting dredging of seed or leasing of unproductive
             Baylor  grounds.   By  allocating its  funds  and implementing  alternative
             policies, VMRC can provide many combinations of aquacultural practices and
             policies to achieve a given market oyster harvest goal. These combinations
             form  the activities  of  an LP  model.   Knowing  how  much each  activity
             contributes to the harvest goal, and recognizing its limited resources, the
             Commission must determine the unique mix of activities required to meet a
             harvest goal at minimum cost over its planning horizon.

             *                                  ~~~~~~~~~~~~-51-

    I        ~~Section 2. 0: The Linear Prozramminz Model

                  The linear programming model described below is the model which has
    I      ~ ~been formulated to  analyze VMRC's decision problem.    The model considers
             the production of market oysters from public and private grounds over a
             period of ten years.   All model activities  are assumed to be initiated at
             the beginning of the year in which they occur.

                  The ten year planning horizon may be thought of as consisting of two
             distinct parts. The model is formulated as if no repletion program existed
    I      ~ ~prior to the first year of the model's planning period.   The first part of
             the planning horizon, therefore, is an interim period over which no market
             oyster harvest  goal is  set.   This  interim period  is necessary  because
    I      ~ ~oysters take,  on average,  2-5 years to reach the three inch minimum legal
             harvestable size (Haven et.  al.  1981).   A lag, therefore, exists between
             the time production activities are initiated and market oysters become
             available for harvest.   The length of the lag depends on whether seed (2-3
             year lag)  or shall (3-5 year lag)   is planted and the growth potential of
             the receiving  system.   The  second part  of the  planning horizon  is the
             period of years over which a specified market oyster harvest goal may be
             set.
                  In the model all public and private oyster bottoms in Virginia have
             been disaggregated into the 13 river systems listed in Table A.I1.
            The indicated number for each river system corresponds to the system
             location depicted in Figure A. 1*. The Potomac river is managed jointly by
             Maryland and Virginia and is not  considered in the model.   Separate river
             systems were identified using two criteria; i) geographic location and ii)
             similarities in environmental characteristics important for oyster growth.

    I       ~~Section 2..j: The Objective Function

                  The objective of the linear programming model is to minimize the
    I      ~ ~present value  of public  plus private  costs of  producing a  prespecified
             level of  market oyster harvest over  the ten year planning  horizon.   The
            public costs included in the model are expenditures for contracted services
             incurred by VMRC  as it carries out its repletion  program.   Private costs
             considered in the model are all costs incurred by private planters in the
            production and harvesting of market oysters and the cost of harvesting
            market oysters to watermen working the public grounds. It is often assumed
            that the public sector has a longer-term investment horizon relative to the

            *Originally only ten river systems were identified for modeling.   Upon the
             recommendation of VIMS oyster biologists, the James and York rivers were
             split into two regions each, the Rappahannock was split into upper, mid-
             and lower sections and the Corrotoman river was incorporated into the Lower
            Rappahannock forming the 13 river systems listed in Table A. 1.

             I                                  ~~~~~~~~~~~~-52-

                                     Table A. 1

                        Description of Model River Systems

    1  Upper James               above James River Bridge

    2   Lower James              below James River Bridge

    3   Upper York

    4   Lower York

    5   Mobjack Bay               including North, East, Ware
                                 and Severn Rivers
    6   Piankatank

    7  Upper Rappahannock

    8   Mid-Rappahannock

    9   Lower Rappahannock       including the Corrotoman to
                                 Windmill Point
    10  Great Wicomico

    11  Upper Management Area    Windmill Point to Smith Point

    12  Pocomoke and Tangier     including Baylor bottoms on
                                 the Bayside of Eastern Shore
    13  Eastern Shore Seaside

                                -53-

    private sector.   Given this assumption,  an  interest rate of 4.51 percent
    was used to  discount public costs to  the end of the  first period.   This
    public rate reflects the 1983 quarterly average interest rate offered on
    long-term state and local government securities (Federal Reserve Bulletin
    1984)   adjusted  by a  5  percent  inflation  rate.   Private  costs  were
    discounted  by an  interest  rate of  6.0 percent.    The  private rate  is
    equivalent to the 1983 prime rate on short term business loans adjusted by
    a 5 percent inflation rate.   The short term private interest rate was used
    because it is assumed that such loans would be used to cover operating
    expenses incurred between harvest periods.

    Section Z.2: Model Activities

        There are two general types of activities considered in the model.
    Activities that result in market oyster production, hereafter referred to
    as primary activities, are represented in Figure A.2 by the rectangular
    boxes.   The primary activities of Figure A. 2 are the final products of the
    production process depicted by a flow chart for each activity.   Activities
    which do not directly result in the production of market oysters are
    represented by the circles in Figure A.2.

    Section 2.2.1 Primary Activities

         The four primary activities are based on current harvest regulations
    and aquacultural practices used in the Chesaspeaske Bay by public and
    private  culturists.   Each  of  these activities  is  uniquely defined  by
    aquacultural technique, harvest technology, bottom ownership and production
    period.

         The first primary activity is a shell-to-harvest activity where fresh
    or dredged oyster shells are planted on Baylor bottoms by VMRC to receive a
    set.   The resulting young oysters are left  to grow to a harvestable size.
    This aquacultural technique has for many years been the most important part
    of VMRC's repletion strategy. For this reason and because setting rates on
    private  grounds   are  usually   insufficient  to   make  shell-to-harvest
    economically feasible, the model includes only the Baylor bottoms as
    candidates for oyster production using this technique.   Setting rates vary
    from river system to river system. A shell-harvest activity is included in
    the model for only those river systems (listed in Table A.2), determined by
    a literature survey and consultation with oyster management professionals,
    with sufficient setting rates to make shell-to-harvest a feasible oyster
    production activity.

         The shell-to-harvest activity is carried out on Baylor grounds.
    Harvesting, therefore, is done by hand tongers. A four year growing period
    is assumed to be required from the time the shelling is initiated and the
    time the first  harvestable oyster is taken.   Upon  consultation with VMRC
    repletion personnel it was further assumed that the shelled oyster bed will
    remain productive, but at a declining rate,  for four years after the first
    oyster is harvested.    A annual decline in productivity of  ten percent of
    the previous years standing crop was assumed.

                                      -54-

           I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

                                                     12

                              V~~~~~~~~~~~~~~~ .-
                                 F11  M                     13
       I~~~~~~~~~~~

                                           m
               I                      p~~~~~~~~~~~~~~~
                                                  P~~~~~~~~~

    I~~ 3

     I~S_

     I                   ~~~~~~~~Figure A. 1 Model River Systems

       *                        ~~~~~~~~~~-55-

    I           ~~~The second and third primary  activity is a seed transplant-to-harvest
            activity.    This activity  involves harvesting  seed from  seed areas  and
            transplanting the seed to grow-out areas on Baylor grounds or to growing
            areas on leased bottoms.   Where setting rates are considered sufficient to
            support self-sustaining  oyster populations on  public grounds,   and where
             losses to diseases and predators to non-indigeneous seed, seed transplant-
            to-harvest activities  were eliminated  from model  consideration.    Public
            grow-out areas and leased growing areas are listed in Table A. 3.
                 The cultural technique for transpant-to-harvest activities are the
    I      ~~same whether seed is planted on public or private grounds.  The distinction
             between primary activity number two (seed transplanted onto Baylor grounds
             by VMRC) and primary activity number three (seed transplanted by private
             individuals  on  leased  bottoms)   is one  of  harvest  technology.    All
             harvesting on Baylor grounds is assumed to be done with hand tongs, while
             all harvesting on leased bottoms is assumed to be done with an oyster
    3      ~ ~dredge.   The production period for both public and private seed-transplant
             activities is three years, where seed oysters are planted at the beginning
             of the first year of the production period and are harvested at the end of
             the third year  of the production period.    The only exception to  this is
    I      ~~seed transplanted on the Eastern Shore Seaside.  Seed transplanted to these
             leased bottoms grow very rapidly and losses to disease and predation are
             heavy if the oysters are left on the bottom for more than eighteen months.
             A two year production period is assumed for leased bottoms in this region.
             According to VMRC repletion officers, seed would only be transplanted to
             areas that do not receive a natural set.   It is assumed,  therefore,  that
    3 ~~the oyster bed will remain productive for only one season.

                  Not all market oyster harvest results from man-induced production.   A
             fourth primary activity is included in the model which permits the harvest
    U      ~~of market oysters from naturally  occurring stocks.   Natural production is
             simply defined as any production of market oysters that is not directly the
             intentional result of Man's repletion  or cultural activities.   The Baylor
             grounds were  established on  the basis  of natural  productivity.   It  is
             assumed, therefore, that all market oyster harvest of natural production
             takes place on the public oyster beds. No attempt is made to determine the
             natural  productivity of  each  river system.    For  the model's  purpose,
             therefore,  -a  given  level  of  annual  Bay-wide  natural  market  oyster
             production is assumed.   This yearly production  is harvested by the end of
             each year of the planning horizon. Table A.4 provides a summary of all the
             primary activities by cultural technique,   harvest gear,  bottom ownership
             and production period.

             Sectio  _Z. 2 : Secondary Activities

                  Secondary  activities  do   not  directly  result  in   market  oyster
             production.   The  secondary activities are,  instead,   support activities
             providing the means through which i) seed is brought into the market oyster
             production process and ii) funds are made available to carry out VMRC's

              I                                  ~~~~~~~~~~~~-56-

    Harvest natural              Shell-harvest              Seed-transplant                                     Seed-transplant
    market oyster                on Baylor                  on Baylor                                           on leased
    production on                Grounds                    Grounds                                             bottoms
    Baylor Grounds

                                                     I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

                                     I                          T                 .
    Hares  with                  Hretwith                   Harvest with                   rnp                  Harvest with
    Hand-tongs Hand-tongs                                   Hand-tong                                           oystr dredge

                               Shelling by                Seed planting                 HarvesPrivate planter
                               VMRC                       by VMRC                        Seed                seed planting

                                                                        FreA       Da epleted ba
                                                                          seed                      seed

                                         Figure A.2; Diagram of Model Activities

             repletion program.    Included in the model  are four seed related secondary
    I      ~ ~activities and two repletion fund related activities.
                 The model permits the harvest of seed from the Baylor grounds on
    I      ~ ~unrepleted and repleted  bars.   Although some seed is  produced by private
            planters,  the  majority of seed  comes from  public seed beds.    For this
             reason private seed production is not  considered in the model.   Seed from
             unrepleted bars represents a stock which  may be exploited.   A given level
    I      ~ ~of annual natural recruitment is assumed for modeling purposes.   If in any
             year this annual stock is exhausted and more seed oysters are demanded,
             then the model permits seed to be produced by including a set of seed
    I      ~ ~production activities.   Unlike  seed from unrepleted bars  which can enter
             the market oyster production process as soon as it is required, seed from
             repleted bars must first be produced by shelling Baylor bottoms to catch a
             strike. River systems identified as seed areas are listed in Table A.5.
             Once set, the immature oysters grow rapidly enough to be harvested by fall
             of the year they were spawned. All activities are assumed to take place at
             the beginning  of any  given period.   A  one year  growing cycle  for seed
             production is assumed even though it may well be the case that the seed
             oysters will be harvestable before the year is up.   Like the market oyster
             shelling activities, a seed bed is assumed to remain productive at a ten
    I      ~~percent  declining rate  for  four years  after the  first  seed oyster  is
             harvested.   Also  included in the  model is  a seed harvest  activity from
             unrepleted bars for each of the seed transplant-to-harvest activities.
    I      ~ ~Figure  A.3 provides  a  pictorial summary  of Tables  A.2,   A.3 and  A.5.
             Cultural techniques determined to be feasible are indicated for each river
             system.

     I           ~~~The harvest  of repleted-bar seed and  the transport of seed  from its
             origin  to the  planting  site  remain to  be  discussed.    Both of  these
             activities will only enter the model solution if seed production enters
    I      ~ ~first.   Seed  that is  produced must  be harvested.    Current regulations
             permit the harvest of seed only with  hand tongs.   A separate seed harvest
             activity is included for each seed production activity to maintain
             continuity  in the  seed to  market oyster  production process.        Separate
             activities are not required, but their absence could mask differing harvest
             technologies or regulations associated with the harvest of seed in one area
    3 ~~versus another.
                  A set of seed transport activities is incorporated into the model for
             two reasons: i) to. define the unique cost of transporting seed from one
    I     ~ ~region to another,  and ii)  to prohibit the transport of seed from a given
             seed area to an MSX incompatible receiving system (as shown in Table A.6).
             A seed transport activity is included to move seed from each seed producing
     I     ~ ~area (from Table A.5) to each grow-out area (Table A.3)  conditional on MSX
             compatibility.
                  Seed resistance to MSX is assumed to improve the higher the disease
             incidence in the system of seed origin.   Seed that originiates in a system
             of relatively low MSX incidence, however, has very little resistance to the

             I                                  ~~~~~~~~~~~~-58-

              Table A.2

    Feasible Shell-Harvest River Systems

            Great Wicomico

            Mid-Rappahannock

            Lower Rappahannock

            Mobjack Bay

            Seaside Eastern Shore

            Piankatank

            Upper Management Area

            Pocomoke and Tangier

                     -59-

            disease and will likely perish before reaching a harvestable size. The MSX
            categories defined in 1968 and reported in Haven et al (1981), are used to
            determine MSX compatability. It is assumed that seed originating in a Type
             I MSX area can be transplanted to any river system of Type I or higher.
             Similaly, seed originating in a Type II river system may only be
            transplanted to Type II or higher river systems and so on as depicted in
            Table A.7.

                 Table A.6 is a matrix of seed and grow-out area compatibilities by
             river system of origin and receiving system.   MSX compatibility is assumed
             to  be the  same on  public and  private grounds.    Over 70%  of the  seed
    I      ~ ~transplanted to leased bottoms in 1981 came  from the James river seed beds
             (VMRC Annual  Reports 1982).   For this  reason,  only James river  seed is
    3        ~~allowed to go to all leased bottoms.

             Section 2.2.3: Tax Collection and Repletion Fund Transfer

                  The  final  secondary  activities  are:    i)   oyster  repletion  tax
    I      ~ ~collection, and ii) repletion fund transfer from one year to another.   One
             source of repletion  funds is the Public Rocks Oyster  Repletion Tax.   The
             r epletion tax  is levied on  all seed and  market oysters harvested  on the
    I       ~ ~aylor grounds.    Any harvest  of oysters  on public  grounds,  therefore,
             generates revenue which goes into the State's repletion program budget.
             The model is designed so that whenever a market oyster harvest or
    I      ~ ~production activity (all production is assumed harvested) or a seed harvest
             activity is initiated a tax collection activity is initiated in the year
             the oysters are harvested.

     U~      ~     ~~I t   is possible  that OR? budgetary requirements will  differ from year
             to year depending on the mix of repletion activities undertaken by VKIRC.
             One would  expect,  therefore,   years of  funding shortages  and years  of
             funding surpluses.   The model permits the  transfer of funds from years of
             budgetary surplus to years of budgetary shortage.

    3       ~~Section 3.0: Constraints

                  In the linear programming model, maximum constraints are placed on the
             availability of private and public oyster bottoms, the OR? budget, and the
             natural production of seed and market oysters on the Baylor grounds.
                  In addition to these resource availability constraints, there is a set
    I      ~ ~of transfer rows which force an activity or sequence of activities into the
             solution whenever a primary activity requires an auxiliary secondary
             activity. If, for example, a seed-transplant activity enters the basis and
    I      ~ ~natural  seed  availability is  exhausted,   the  transfer rows  force  the
             following sequence of secondary activities into the basis; seed production,
             seed harvest and seed transport.   Another set of transfer rows initiates a
             tax collection activity any time seed or market oysters'are harvested on
             public grounds.   Also  included in the model  is a set of  transfers which-
             effect the transfer of OR? funds from one year to another.

             I                                   ~~~~~~~~~~~~-60-

                                 Table A.3

                     Public and Private Growing Areas

      Baylor Grounds                 Private Grounds

    Great Wicomico                 Upper Management Area

    Upper Rappahannock             Great Wicomico

    Mid-Rappahannock               Upper Rappahannock

    Upper York                     Mid-Rappahannock

    Lower York                     Lower Rappahannock

    Upper Management Area          Mobjack Bay

    Piankatank                     Upper York

                                  Lower York

                                  Piankatank

                                  Upper James

                                  Lower James

                                  Pocomoke and Tangier

                                  Seaside Eastern Shore

                              -61-

    I           ~~~~The final set of constraints is the setting of the harvest goal.   The
            harvest goal is constrained with equality for each of the ten years of the
            planning horizon.

            Section 4. 0: The Computer Model

    I           ~~~The  linear  programming model  just  described  is now  presented  in
            tableau form  in Figure  A.4.   The  columns of  the tableau  represent the
            alternative activities which may be chosen to achieve the prespecified
            level of market oyster harvest.
                 The'objective function for the model is described in the "ICOST"i row.
            Included in this row are the public plus private costs of initiatinga
            public grounds repletion and harvest activity or a private bottoms market
            oyster production and harvest activity.   The coefficients in the objective
            function row represent the total cost of undertaking a single unit of a
            given activity discounted to the first year of the ten year planning
            period.

     I           ~~~The bottom acreage,   shell,  seed,  and budget  requirements for each
            activity are included in the rows  section.   Also included in this section
            are tax revenues generated by each activity, the quantity of seed resulting
    I      ~~from a given seed production activity,  and the bushels of harvested market
            oysters generated by each primary activity.

                 Maximum levels of private and public acreage are listed under the
    I     ~ ~column labeled "RHS.t'  Limitations on repletion funds, and natural seed and
            market oyster harvest are also listed in  this column.   The budget for any
            given year can also be increased by transferring unused funds from one year
            to be used in another.   This  particular activity is represented in Figure

                  In this submatrix the budget for the year receiving the fund transfer
            is increased while the budget year from which the funds are taken is
            decreased by the amount of the transfer.    This is indicated by a negative
            one in each "BT" row of any year (j) receiving a transfer and a positive
            one in  the "BT" row  of the year  (i)  making  the transfer.   It  is only
            possible to transfer funds forward in the planning period. A fund transfer
            activity, therefore, is included for all years i and j such that j > i.
    I     ~ ~Also  included in  the  RHS section  is the  prespecified  level of  market
            oysters, as indicated by the row labeled "GOAL."

             I                                  ~~~~~~~~~~~~-62-

                                                                         Table A.4

                                                                Summary of Primary Activities

                                                                                            Bottom           Production
                                   Cultural Technique                  Harvest Gear         Ownership            Period*

            Shell-Harvest     Plant shell on Baylor Bottoms            Hand-tongs           Public              4 Years
                               to receive a set and grow-out
                               to a harvestable size.

             Public Seed-      Transplant seed on Baylor                Hand-tongs           Public              3 Years
             Transplant-       bottoms and allow grow-out
             Harvest           to a harvestable size

             Private Seed-     Transplant seed on leased                Oyster Dredge        Private             3 Years**
             Transplant-       grounds and allow grow-out
             Harvest           to a harvestable size
    ON
             Natural                                                    Hand-tongs           Public
             Production

                            *The production period includes harvesting the oysters.

                            ** Except for Eastern Shore Seaside where growth is rapid
                            and losses to predation are heavy if seed is left on the
                            bottom for more than 18 months.

    I

                                                                  none~~~~~~~~~~~'
                                 u r'"I~~

                            I  -       ?..,-w.I,,-                 . ..-'I-..~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.,.;.

                      I ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~�::~;                                  c- -.., ..

                                                                 000006~~~~~~~~~~~~~~)ij

                                                                      o~~~~~~~~~~~wn
                   I~~~~~~~~~~~~

                                  Figure A. 3 Cultural Technique Feasibility

                   I                                 ~~~~~~~~~~~~-64-
             I,~~~~~~~~~~~~~~~'

        The technical coefficients for the model define the relationship
    between a given activity and a given constraint.   The coefficients denoted
    by the letter "F" in Figure A.4, for example, define the quantity of fresh
    shell  required  in  order  to   undertake  a  particular  shell-to-harvest
    activity.    The  estimation  of  these  technical  relationships  will  be
    discussed in detail in Part 2 of this appendix.

        The input data analyzed by the linear programming model is represented
    by generalized  notation in  the matrix tableau.    Table A.8  explains the
    notation used.

                                      -65-

          Table A.5

    Public Grounds Seed Areas

         Upper James

         Lower James

         Mobjack Bay

         Lower Rappahannock

         Piankatank

         Great Wicomico

                  -66-

                                                        Table A.6

                                   MSX Compatability by Seed Origin and Receiving System

               Upper  Lower  Mobjack  Pianka- Upper   Lower Mid-   Great   Upper           Pocomoke  tipper  Lower
               York   York   Bay       tank     Rapp.   Rapp.  Rapp.  Wicom.  Mgt. Area  &Tangier  James  James

    Upper James  C                                 C        C     C      C        C                    C

    Lower James  C       C                         C       C      C      C        C                    C      C

    Lower Rapp.  C                                 C       C      C      C        C                    C      C

    Piankatank   C                       C         C        C     C      C        C                    C      C

    Great Wicom. C                                 C        C     C      C        C                    C      C

    Hobjack Bay   C      C      C        C         C        C     C      C        C            C       C      C

                Source: Haven at. al. (1981)
                A "C" indicates MSX compatability.

                           Table A.7

              River System Compatability by MSX Type

                               MSX Type of

                             Receiving System

                     I  I          II        III        IV
                          ml~~~~~~~~~~I

                   I   X           x          x         x

                  II               X          X         X
    MSX Type of

    Seed Origin
                 III                          x         x

                  IV IX

    This table shows the MSX Type relationship between system of
    seed origin and receiving seed origin and receiving system.
    An "X" indicates compatible MSX types.

                              -68-

                  SHFF r      SHFD)r       SHSF rt     SISD rt      TSF rt      TSSF rt      TS Srt       TSL rt       PSFF rt     PSFD r

    RBF        I
     RSt

    RL t1

    FRS                F           F                                                  F                                     F

    DRS                            0                        D                                     0                                     0

    NS PC

        t

    BT                 B           8                         B                 B                  B                         B           B
      t
    GOAL              G            G            C           G            C           C                         G

    TR               -T           -T          -T           -T          -T           -T           -T

    TS T                                                                SR          SR s           ISR

    TSTL rtSRL
      THrt

    THT rt-SP'                                                                                                                         -SP'

       COST c SH1FF           CSHFO        CSHSF       CSHSD         TSFr        cTSsr        IS          cTSL         cPSFF       cPSFD
                       r t         r t          rt          r t         rt            rt     TSrt             rt            r~t         r t

                                              Figure A.4: Model Tableau

                 PSSF rt     PSSDr0       HAR Sr      SMr    t    STORL t      HNSP t      HNMOP       TAXC t       TFUND t     RH;

    RB F t<RBF,~

    RBS t                                                                                                                            R6 S'
     RLt      <                                                                                                                     RL

    FRS tF                                                                                                                       >0

    DRS~                          0 1)0

    NSPC                                                                            1

    BiTt              B           B                                                                         -             I      < RB*

    GOAL                                                                                         C G

    T R t- T                                                                        T           -T           10

    TST                                                   -10

    TSTL                                                               1-                                                        =0

    TSH                                       -11                                                                                =0

    THT rt-SP                    -SP I

                     rt          rt                                    t           tt

                                    Figure A.4: Model Tableauu (continued)

        TFUND12  TFUND13  TFUND14  TFUND15 .....TFUNDij    RHS
       I
    BT1    1         1        1         1                 <  RB*

    BT21 -1                                               <  RB*

    BT3             -1                                    <  RB*

    BT4                       -1                          <  RB*

    BT5                                 -1                <  RB*

    BTiI                                            1     <  RB*

       I
    BTjI                                            -1    <  RB*

    * Note that the submatrix presented here includes only
      the first four years of the planning period. The sub-
      matrix continues in a similar manner for the remaining
      years of the planning period.

                        Figure A.5
                 Fund Transfer Submatrix

                                -71-

                                             Table A. 8
                                            Tableau Key

            Subscripts and Suoerscrints

    I       ~~t = time period; t =1-10

            r = river system; r =the river systems listed in Table A. 1

            i = the discount rate. An interest rate of 4.51 percent was
                utilized to discount the future cost of public expendit-
     I        ~~~ures for oyster bed repletion.  Private grounds product-
                ion expenditures are discounted by an interest rate of
     *~~~6pret

            n =the number of years over which discounting occurs.

    *      ~~Coefficients

            C =the cost in current dollars of undertaking any secondary
     *          ~~~or primary activity.

            F = the number of bushels of house shell required by an activity.

            D =the number of bushels of reef shell required by an activity.

            B = the amount of public expenditures required to initiate
                one unit of any public repletion program activity.

            G = the contribution toward satisfying the harvest goal made
                by a unit of any given primary activity.

            T = the tax revenue generated by a unit of seed or market
                oyster production on Baylor grounds.

            SR =the number of bushels of seed required by a public
                 seed-transplant activity.

    I      ~~SRL =the number of bushels of seed planted on private-grounds.

            SP  the bushels of seed produced on public grounds from a
     I         ~~~unit of a seed production activity.

            RBF* = the maximum acreage of firm public bottoms in a given river.

            RBS* = the maximum acreage of soft public bottoms in a given river.

    I      ~~RL* =the maximum leased acreage in a given river.

             I                                  ~~~~~~~~~~~~-72-

            RB* =the maximum amount of repletion funds available in any
     I          ~ ~~~given year.
             G= the market oyster harvest goal.
    U       ~~Columns
            SHFF = a shell-harvest activity using fresh shell on firm
                   Baylor grounds. Rivers included in this activity
                   and the next three activities are listed in Table A.2

    I       ~~SHFD = a shell-harvest activity using dredge shell on firm
                   Baylor bottoms.
            SHSF = a shell-harvest activity using fresh shell on soft
                   Baylor bottoms.
            SHSD = a shell-harvest activity using dredge shell on soft
      I           ~ ~~~Baylor bottoms.

            TSF =transplanting seed to grow-out areas on firm Baylor
                  grounds. River systems included in this and the
                  next two activities are listed in Table A. 3.

            TSSF =transplanting seed to grow-out areas on soft Baylor
                   bottoms where shelling with fresh shell used.
            TSSD =transplanting seed to grow-out areas an soft Baylor
      I           ~ ~~bottoms where shelling with dredge shell is used.
            TSL =transplanting seed on private grounds, river systems
      I          ~ ~~included in this activity are listed in Table A. 3.
            PSFF =shelling firm Baylor grounds with fresh shell to
      I          ~ ~~produce seed, river systems included in this and the
                    next three activities are listed in Table A.5.

            PSFD =shelling firm Baylor grounds wi-th dredge shell to
      I          ~ ~~~produce seed.

            PSSF =shelling soft Baylor grounds with fresh shell to
      I          ~ ~~~produce seed.
            PSSD =shelling soft Baylor grounds with dredge shell to
      I          ~ ~~~produce seed.
            HARS = harvest seed produced by the previous activities.
    I      ~~STOR = transport the harvested seed (from the HARS activity)
                    to a receiving system on Baylor bottoms.
             I                                  ~~~~~~~~~~~~-73-

    STORL = transport the harvested seed (from the HARS
            activity) to leased bottoms.

    HNSP = harvest natural seed production.

    HNMOP = harvest naturally occurring market oysters.

    TAXC = tax collection.

    TFUND = transfer funds from one year to another.

    Rows

    RBF = firm Baylor grounds.

    RBS = soft Baylor grounds.

    RL = leased bottoms.

    FRS = fresh shell.

    DRS = dredge shell.

    NSPC = natural seed production.

    NMOP = natural market oyster production.

    BT = VMRC's repletion budget.

    GOAL = the prespecified level of market oyster harvest.

    TR = tax revenue.

    TST = transfer transported seed to a public seed-transplant
          activity

    TSTL = transfer transported seed to a private
           seed-transplant activity.

    TSH = transfer seed harvested seed to a seed transport activity.

    THT = transfer seed produced seed from repleted bars to
          a seed harvest activity.

                                       -74-

    I
    I
    I
    I
                                            Appendix A, Part 2
                                       The Linear Programming Model:
                                   Estimation of Technical Coefficients

    I
    I
    I
    I

    I
    I
    I
    I
    I
    I
     *                                                    -75-
     I

                                        Appendix A, Part 2

         I                          ~~~~~~~~The Linear Programming Model:
                               Estimation of Technical Coefficients

            Section 1.O: Introduction

     *           ~~~The decision  model developed in Part  Ilpermits anevaluation  of the
            alternative   oyster  grounds   management  options   available  to   VMRC.
            Underlying each management option is the assumption that the effects of
             implementing a given policy or repletion option are known.   It is assumed,
             for example,   that VMRC knows exactly  how many bushels of  market oysters
            will be produced when it plants seed  in any given river system.   However,
            the information base upon which management decisions are formed is
    I      ~ ~imperfect.   An inadequate data base,  the absence of an efficient means of
             collecting and processing fisheries management information and the lack of
            economic and biological modeling contribute toward management uncertainty.
    I      ~ ~The purpose of this  chapter is to provide a detailed  treatment of how.the
            technical coefficients required for the model developed in Part I were
             estimated.    Data  requirements  for objective  function  constraints  and
             activities are discussed separately. Included in each section is a list of
            data sources used and a treatment of the informational or data problems
             associated with each coefficient type.

    I       ~~Section 2.0: Objective Function Coefficients

                 The objective function coefficients indicate the total public plus
    U      ~ ~private cost of undertaking a given  primary or secondary activity.   These
             cost coefficients may be broken down into three general categories; public
             grounds  repletion costs,   private grounds  production  costs and  private
    3       ~~harvest costs.

             Section 2. 1: Public Grounds Repletion Costs

     I           ~~~All activities that take place on  public oyster rocks have associated
            with them a  repletion cost and a private harvester  cost.   Together these
             costs make up the total cost of undertaking any public grounds activity.
    I      ~ ~The private harvester costs, however, will be discussed later as estimation
             of these coefficients merits separate consideration.

                  VMRC contracts the services of private watermen to carry out its
    I      ~ ~repletion program.    Estimation of these  cost coefficients  under current
             repletion program policies is an easy task as the per-bushel costs for
             contractual services are  readily available from VMRC  Annual Reports.   To
    I       ~~put these costs on  a per-acre basis it  is necessary to multiply  the per-
             bushel cost of seed or shell planted by the quantity planted per acre. The
             public grounds shell planting costs are computed as follows:

             *                                   ~~~~~~~~~~~~-76-

                  Repletion Cost/Acrej
        I                    ~ ~~~~~~(a/bushe~l shellj) x (bushels plantedi',1')
                  where i = river system
                        j = shell type (fresh or dredge shell)
                        k = bottom type*
             Public shelling costs, therefore, depend on the river system shelled, the
    I      ~ ~shell type  and the quality  of the  growing bottom.   Public  grounds seed
             transplanting costs may be calculated in similar fashion by the following
    *        ~~formula:

             Seed Planting Cost/acrej
                             (s/bushel for seedh) x (bushels planted**)
                  where i = receiving river system
                        h = system of seed origin

     U           ~~~Using  these formulae,   the  repletion cost  of  any specific  public
             grounds  repletion-harvest  activity  can be  determined.    The  objective
             function coefficient for any of these activities is simply the sum of the
             repletion cost and the cost of harvesting the resulting oysters.
                  The repletion costs are reported in tables from 1983 VNRC repletion
             cost data sheets (unpublished VMYRC records).   These recorded costs include
             the cost per bushel of acquiring,   transporting and planting shell or seed
             by shell type, seed,  and river system.   Unfortunately these costs are not
             broken down into their individual components.

                  The  inability to  consider purchasing,   transportation and  planting
             costs separately masks the fact that each repletion activity is itself a
    I      ~ ~process composed of several subactivities.  Redefined in this way it can be
             seen that there exists alternative shell or seed sources and their
             associated transportation costs, transportation technologies, and shell or
    I      ~ ~seed planting technologies.   If it were  possible to examine each of these
             costs separately it would enable the introduction of a greater level of

           I~~~~~~~~~----------
             *Two classes of bottom are considered in the model, firm and soft bottom.
             Bottoms in which grab samples contain at least 50% shell or shell fragments
    I      ~ ~in volume are defined as being firm (Haven et.  al.   1981).   Firm bottoms
             require planting of 7,000 bushels of shell per acre to make them suitable
             for oyster  culture.   All other  bottoms are  classed as soft  and require
    I      ~ ~10,000 bushels of shell per acre to make oyster culture possible.
             **VNARC personnel recommend planting between 550 and 750 bushels of seed per
             acre depending on the size and the spat count (number of spat per bushel)
             of the seed.   An average of 650 bushels  per acre was chosen for the model
             to allow for this variation in seed quality.

             I                                   ~~~~~~~~~~~~-77-

             detail into the model.   The model would  be able to determine not only the
    I      ~ ~shell type to plant,  where to plant it,   and how much to plant,  it would
             also  determine  the least  costly  way  of purchasing,   transporting  and
             planting the shell.

    I~~~Sci   2 .2:  Piate Grounds Prdcto  Costs

                  Before describing how the private planter production costs were
             estimated it is first necessary to discuss the assumptions that were
             required  to motivate  private grounds  market oyster  production.   It  is
             assumed  that private  planters seek  to  maximize profit.    In so  doing,
             leaseholders minimize their costs by selecting the most cost-effective
             combination of activities required to produce market oysters.   Recall that
               grondsmarket  oyster production be  profitable.   Economic theory  of the
             firm, however, predicts that the individual will only produce a positive
             amount of output if at least all operating costs are recovered in the short
             run and at least all fixed plus operating costs are recovered in the long
    I      ~ ~run.   Given that the model considers a ten year planning period for public
             and private decisions, it is assumed that no private grounds production
             will occur unless long run economic returns to private grounds market
    N      ~ ~oyster production is greater than or equal to zero.   In order to guarantee
             that private grounds market oyster production is positive the assumption is
             made that the price of market oysters is always at least as great as the
             unit cost of  producing market oysters.   Similarly,   for private watermen
             working the public grounds, it is assumed that the price of market oysters
             is always sufficient to cover all harvest costs incurred by the harvester.
             The costs associated with private grounds market oyster production are now
             discussed.   As previously stated,  harvester costs  will be presented in a

     *           ~~~The costs associated with private grounds oyster production considered
             in the objective function, consist of the cost of acquiring, transporting,
             and planting seed along with the cost of harvesting the market oysters.
             The model considers production of market oysters in a two step process by
             including two  separate activities.   One  for purchasing  and transporting
             seed oysters, and another for planting seed and harvesting market oysters.

     I           ~~~Each seed purchase and transport activity defines a unique combination
             of the river system from which seed is transported and the receiving river
             system. The objective function coefficient for each activity is determined
    U      ~ ~by the price  of the seed plus  the cost of transporting  the seed.   These
             coefficients are estimated by determining the price of seed in each seed
             producing river system and the transportation cost of bringing the seed to
             the planting site.   VMRC seed and  market oyster production and price data
             were used to determine the price of seed in seed producing river systems.
             Little  information,   however,   is  available to  estimate  the  cost  of
             transporting seed.   According  to records of a  Rappahannock river planter
             obtained by Haven et. al (1981), transportation costs ranged between 25 and
             50  cents per  bushel.    Unfortunately no  insight is  offered  as to  the

             1                                   ~~~~~~~~~~~~-78-

    distances corresponding to these costs.

         In order to establish a  relationship between transportation costs and
    distance, the 25 to 50 cent cost interval is assumed to provide upper and
    lower bounds to  per bushel transportation costs.   The purpose  here is to
    provide a  means of  assigning transport costs  based on  relative distance
    between seed origins and receiving systems.   In  this respect the 25 to 50
    cent interval  is being used  as an  indexing mechanism.   Using  five cent
    increments,   relative transportation  costs  were  assigned to  each  seed
    purchase and transport activity.   These assignments  are made on the basis
    of the geographical location of a receiving system relative to how far away
    it is from a specific seed origin when compared to the closeness of other
    potential receiving river systems competing for seed from the same source.
    For example, the cost assigned to transporting seed from the James to the
    Rappahannock is $.40.   The cost of  transporting seed assigned to the York
    from the James is $.25.   Here shipping seed  from the James to the York is
    less costly than shipping seed from the James simply because the York is
    closer to the seed  source.   The opposite is true when  shipping seed from
    the  Great Wicomico  to  the Rappahannock  and the  York,   ($.30 and  $.45
    respectively).

         The transport  costs are not inflated  because they are based  only on
    relative distance between any two river systems and not on actual shipping
    cost data.   If these shipping costs  were inflated,  only the magnitude of
    the cost would change.   The relative  difference in transport cost between
    any two river systems as compared to any other two river systems, however,
    would remain unaltered.   The objective  function coefficient for each seed
    purchase-to-transport activity is left on a per-bushel basis and may be
    calculated with the following formula:

         Purchase-to-Transport Cost/bu i =
               Seed Pricej + transport cost from system j to system
         where: i = receiving system
                j = seed origin

         The second step in the production process is the seed planting and
    market oyster harvesting activity.   Once  again a discussion of harvesting
    costs will be  put aside momentarily.   Seed planting  costs simply involve
    the costs of putting the seed on leased growing bottoms.  For simplicity it
    is assumed that a uniform planting technology is employed by all private
    planters.   Seed planting costs  can then be assumed to be  the same across
    all private planters and river systems.    Seed planting costs are reported
    by Haven et. al. (1981) as being $.30/bu (1975 dollars).   When inflated to
    1983 dollars (using the CPI), and multiplied by a fixed per acre planting
    rate,   the cost  of planting  seed on  any one  acre of  leased bottom  is
    $412.5*.

    *According to Haven et. al. (1981), planting rates on private grounds range

                                       -79-

                  The objective function coefficient for a one acre unit of any private
    I      ~ ~seed-transplant-harvest activity is  the sum of the seed  planting cost and
             the cost of harvesting the resulting market oysters. The following formula
             can be used to determine the objective function coefficient for each
             private seed-transplant-harvest activity:
                  Seed-Transplant-Hlarvest Cost/acre =

                  Seed Planting Cost/acre + (Harvest cost/bu.) x

     3            ~~~~(bushels harvestedi). **

                  where: i = river system

     I           ~~~Estimation of private  production costs is made difficult  by the lack
             of published  information on  what these  costs are.    The records  of the
             Rappahannock grower mentioned previously constitute the only source of
    I      ~~published quantitative data which was made available.   While these records
             are better than none at all, they do not represent a sample of the cost
             conditions faced by other planters in the Rappahannock or any other river
             system.   The lack of published information on private leaseholder's oyster
             production techniques also presents a problem in that there is no way to
             ensure that all relevant cost information has been included in the
             production cost estimates incorporated in the model.   For example,  during
    I      ~~the normal production process some amount of shell is lost due to siltation
             or removal during harvesting.   Substrate maintenance costs are, therefore,
             likely to be incurred.   It was not possible to determine under the current
             information base  what these  costs might be.    A better  information base
             would permit more accurate and reliable estimation of private market oyster
             production costs.

             between 500 and 1,000 bushels per  acre.   Planting rates chosen by private
     I      ~ ~planters  depend on  seed size  and the  firmness of  the growing  bottoms.
             Bottom type for all leased bottoms is assumed to be the same across all
             planters and river  systems.   An average planting rate of  750 bushels per
     3      ~ ~acre-was  chosen for  the model  to account  for varying  seed size  and to
              reflect a bottom quality which is assumed to be representative of most
              leased acreage.

             **Note that the seed planting cost per acre has already been assumed
              constant.   It  will be shown  later that per  bushel harvest cost  is also
              assumed constant.   The value of this coefficient varies,  therefore,  only
     3     ~~with the number of bushels of market oysters harvested from a given acre of
              leased bottom in a given river system.

              *                                   ~~~~~~~~~~~~-80-

             Section 2.3: Oyster Harvesting Costs

                  The harvest of market oysters takes place on both public and private
             grounds. It is assumed that only hand tongs are used on public grounds and
    I      ~ ~all private planters use an oyster dredge.   It is necessary, therefore, to
             estimate a cost coefficient for each gear type.   Both hand tong and dredge
             harvest costs were estimated by creating a budget which was estimated on an
             annual cost per  harvest season basis.   Items included in  each budget are
             vessel and gear maintenance, fuel, wages, food, and amortized vessel and
             gear principle plus interest costs.

     I           ~~~~Table A.9 presents the format that was used to form each budget.   The
             per bushel harvest cost for each gear type was estimated by dividing total
             annual harvest cost by average annual landings for a representative
    I      ~ ~harvester.   This coefficient is assumed to be constant for all harvesters.
             It is now possible to substitute this per bushel harvest cost coefficient
             into the following formula to obtain the objective function coefficient for
             each activity previously discussed in this section.

                  Objective Function Value i,k=~

     I           ~~~$/activity unit ~+ (harvest cost/buj) x

                  (bushels harvestedi,k)
     I          ~ ~~where: i = activity type
                         j = gear type
                        k = river system

                  The principle source of data for compiling the harvest budgets is the
             Chesapeake Bay Harbors Study (1961). This study, conducted by the Corps of
             Engineers in .1961 surveyed watermen to determine various harvest related
    I      ~ ~expenditures.   While  the study does  not construct budgets  for different
             gear types,   it does provide insight  into the cost items  associated with
             harvesting oysters for several gear types and vessel sizes.   Also included
             in the survey is information relating to hours and days worked per year and
             average daily catches. The more recent work by Haven et. al. (1981), The
             Oyster Industry of Virgini:    Its Status,  Problems and Promise,  was also
    I      ~ ~used  to confirm  and supplement  the find ings  reported in  the the  Corps
             study.

                 Even with these sources, one basic difficulty arises. While technical
             information on vessel, gear, fuel and labor costs is not difficult to
            obtain, information on average daily catch by gear type remains elusive.
            The problem arises because daily catches vary depending on where oysters
    I      ~ ~are  being harvested,   how many  men are  in the  boat and  even with  the
            harvester himself. The most complete information which is contained in the
            Corps study reports a range of 20-300 bushels per day for a medium dredge
             and 5-100  bushels per day  for hand tongers.    These ranges apply  to the
             entire survey area which includes only the Southern half of the Virginia
            portion of  the Chesapeake Bay.    More reliable harvest  cost coefficients

                                                       Table A. 9

          I                                ~~~~~~~~~Annual Harvest Cost Budget

    I            ~~~Variable Costs

                            Vessel Maintenance

                            Gear Maintenance     ___

      3                   ~~~~~~Fuel__

                            Wages

       I                   ~~~~~~Food__

            3                                   ~~~~~~~~~~~Total Variable Costs

                  Fixed Costs

       U                   ~~~~~~Vessel Principal

       *                   ~~~~~~Gear Principal__

                             Interest Payment

             3                                   ~~~~~~~~~~Total Fixed Cost___

                                                   Total Cost___

              I                                    ~~~~~~~~~~~~-82-

            would necessitate a new survey or improved methods of catch reporting to
    I      ~ ~obtain a  better understanding of  what average  daily catches might  be by
             region and gear type.
             Section 1.0.: Estimation of Constraint Coefficients

                 This section discusses only estimation of the coefficients which
            determine the bounds  or Right-Hand Side (RHS)  for  each constraint.   All
    I      ~ ~other coefficients  found in the constraint  rows will be discussed  in the
            Activities Coefficients section of this appendix.

                 Referring to the model tableau,  (Figure A.4)  it can be seen that the
            first three constraints  are oyster grounds acreage  constraints.   The RHS
            for the  constraints RBFt and  RBSt define the  total quantity of  firm and
            soft bottomed Baylor grounds respectively in  any given river system.   The
    I      ~ ~RHS  coefficient for  RLt'defines  the  total available  acreage of  leased
            bottoms in any given river system. In the most recent survey of the Baylor
            grounds VIMS scientists classified each discrete oyster growing area by
            size and  bottom type.   This information  is recorded and reported  in The
            Present and Potential Productivity of th Baylor Grounds in Virginia (Haven
            et.  al.  1981).   Total availability of  public grounds by bottom type and
            river system was determined by summing the acreage of each discrete area
            classified as being at  least ten acres in size.   The  ten ace cut-off was
               offiersconsidered feasible to replete.   Acreage of privately held oyster
            grounds by size of holding is published in Th Oyster Industry of Virginia:
            Lt~  Status,   Problems Promise (Haven at.   al.  1981).   The  total lease
            acreage was estimated by determining the amount of privately held bottoms
    I      ~ ~in each river system  held in units of twenty acres of  more in size.   Any
            acreage held in units less than twenty acres is either riparian or
            considered too small to be commercially productive and was, therefore, not
    *       ~~included in the leased bottom totals.

                 Following the acreage constraints are two constraints, one for each of
            the two different shell  types used by VNRC in its  repletion program.   An
            inspection of the RIHS coefficients shown in Figure A.4 for each of these
            constraints (FRSt and DRSt )  reveals that they have no  upper limit.   The
            reason for this is a lack of information in regard to the limits of
    I     ~ ~availability of  either reef  or fresh  shall.   There  is no  way to  tell
            whether VMRC uses reef shell instead of fresh shell or vica versa because
            one is in short supply relative to another. Alternatively, there may other
    I     ~ ~reasons for choosing one shall type over the other.   In some studies,  for
            example,   reef shell  has  been found  to be  slightly  more efficient  in
            catching spat than fresh shell (Campbell and Forste, 1978). The lack of an
            upper bound avoids this measurement problem as the quantity of either type
            of shell used becomes an output of the model solution.
                 The constraints NSPCt and NMDPt determine the limits of natural
            (unaided  by man)   seed and  market  oysters produced  annually on  Baylor
            grounds.   Annual natural  seed production was estimated  by averaging seed

             *                                   -~~~~~~~~~~~~83-

    harvest reported in VMRC Annual Reports and VMRC Oyster Repletion and
    Production Data (in  pub.)  for the years 1976-1983.   It  was then assumed
    that some of that  production had been man-induced.   The  quantity of man-
    induced seed oyster production can be calculated by multiplying the number
    of acres shelled in  the James River seed area in the  previous year by the
    corresponding seed oyster productivity coefficient*. This estimate of man-
    induced seed oyster production was then subtracted from total seed
    production to obtain an estimate of naturally produced seed. This quantity
    is estimated with the following formula:

         Natural Seed t=,Total Seed Harvested t'

         (Acres Seed Beds Shelled it-) x (Productivity i).
         where: i = river system
                t = time

         Natural market oyster production was calculated in a similar manner.
    Total public  ground market  oyster production was  averaged over  the same
    eight  year  period.      The  1983  repletion  program  was   chosen  as  a
    representative repletion  year.   The man-induced market  oyster production
    was then estimated by  summing the product of repleted acres  in each river
    system and the appropriate market  oyster productivity coefficient.   Total
    man-induced market oyster production was then subtracted from total public
    grounds production to obtain an estimate of "natural" market oyster
    production. In formula form this coefficient may be expressed as;

         Natural Market Oyster Production =

         Total Public Grounds Production  t

         Sum (Repleted Acres j, t-z ) x

         (Productivity Coefficient i~j)
         where: i = river system
                j = type of repletion activity
                t = time
                z = maturation period ie. for;
                    j = shell-harvest, z = 3
                    j = seed-transplant-harvest, z = 2.

         The  RHS  coefficient  for  the BT  row  represents  the  total  funds
    available to VMRC to carry out its repletion activities.   This coefficient
    was estimated by averaging VMRC expenditures for repletion purposes over
    the years 1979-1982. VMRC Annual Reports were used to obtain the necessary

    *The term "productivity coefficient" refers to the total production of seed
    or market oysters per unit of a seed or market oyster production activity.
    The estimation of these coefficients are discussed in the next section.

                                       -84-

             data.

                  The coefficient for the prespecified harvest goal was determined by
             averaging oyster production from both public and private grounds to
    U      ~ ~determine a total market oyster production goal.  This coefficient provides
             a harvest goal under current repletion policies aiid budgetary levels.   The
             initial production goal can be varied and the cost and policy implications
             of an  increased harvest  goal examined.    Harvest on  public grounds  was
             averaged over  the 1976-1983 period.    VMRC production and  repletion data
             were used for this average.   Private grounds market oyster production data
             fr om VMRC Annual Reports were only available for the years 1976-1980.   The
    *~~~sum       of  average public  and  private  market  oyster production  was  then
             calculated to estimate current average annual market oyster production.

     3           ~~~The  remaining  rows  in  Figure  A.4  are  transfer  rows  whose  RHS
             coefficients are  by definition  equal to  zero.   These  rows will  not be
             further discussed.

    U       ~~Section 4.0: Estimation of Matrix Elements

                  The following discussion will deal specifically with the matrix
             elements of the  model tableau.   Once again  Figure A.4 will be  used as a
             reference.   The matrix elements in the RBF, RBS,  and RL rows indicate the
             amount of Baylor or lease acreage required to undertake any given activity.
              Acoefficient of  1 will be found in  the intersection of any  one of these
             rows and  market or  seed oyster  production columns.    The interpretation
             being for  every unit of  a seed or  market oyster production  activity one
    *       ~~acre of bottom must be used.

                  All matrix elements denoted by the letter F represent the quantity of
             fresh shell required by employing a unit of any particular oyster
    I      ~ ~production activity.    Similarly the letter  D represents the  quantity of
             dredge shell  required per unit of  given oyster production  activity.   An
             inspection of these coefficients shows that all of them are associated with
    I      ~ ~public grounds repletion activities.   Estimation  of these coefficients is
             based, therefore, on shelling rates recommended by VMRC pesonnel.

                  The next set of matrix coefficients is denoted by the letter B in
    U      ~ ~Figure A.4.  These coefficients define the expenditures required by VMRC to
             undertake an acre of any public grounds seed or market oyster repletion
             activity.   VMRC contracts  private individuals to carry  out its repletion
             a      c      iiis The  value of  these services represents  the cost  or budget
             requirement for a particular repletion activity.   These costs are reported
             in the VMYRC Annual  Reports on a total cost per  river system basis.   Also
             reported is the total amount of shell or seed placed in each river system.
                  The coefficient B was estimated by calculating the per bushel cost of
             planting fresh or  dredge shell or seed  by river system.   The  per bushel
             cost of planting shell or seed was multiplied by their respective shell or
             seed per acre planting rates.   The  resulting product yields the estimated

             I                                   ~~~~~~~~~~~~-85-

             budget requirement of undertaking an acre of a given repletion activity.
    I      ~ ~In formula form, this relationship may be expressed as follows:
                  Bushels/acrer,i = ($/bur,i) x (planting ratej).
     I          ~ ~~where: i = river system
                         r = type of repletion activity
                         j = material planted ie. shell or seed.

                  The elements denoted by T determine the amount of dollars generated by
             initiation of any public grounds market oyster or seed oyster harvest
    I      ~ ~activity.   The  coefficient T  is a function  of the  quantity of  seed or
             market oysters harvested on public grounds and the per bushel price of the
             seed or  market oyster.   The  tax revenues  come directly from  the public
    I      ~ ~rocks oyster  repletion tax  which is  levied on  all oysters  harvested on
             public grounds with the amount of the tax depending on the per bushel sale
             price of  the harvested oysters.   Tax  rates from seed and  market oysters
             were obtained  from Laws of Virginia  (1980).   The coefficient T  was then
             estimated by multiplying the appropriate tax rate ($.50 for all market
             oysters and $.10 for all seed oysters) by-the number of bushels of seed or
             market oysters produced when a given seed or market oyster production
             activity was initiated.
                  The matrix coefficients denoted by SR and SRL indicate bushel per acre
             seed planting rates by public-market oyster repletion and private market
             oyster production activities respectively.   Seed planting rates for public
             grounds market oyster repletion activities were determined through personal
             interview with VMRC  repletion officers.   Seed planting  rates for private
             grounds market oyster  production activity were determined  by a literature
             search to be 750 bushels of seed per acre, (Haven et. al. , 1981; Bailey and
             Biggs, 1968).

                  Initiation of any public or private market oyster production activity
             results in a specific level of market oyster harvest which contributes
    I      ~~toward the  satisfaction of  the prespecified  market oyster  harvest goal.
             These  coefficients are  indicated  by the  letter G  in  Figure A.4.    An
             examination of these coefficients shows that they all correspond to either
    3 ~~a shell-harvest activity on public grounds or a seed-transplant-harvest
             activity on public or private grounds.

                  Seed-transplant-harvest coefficients were determined by establishing a
             relationship between bushels of market oysters produced per bushel of seed
             planted.   This  relationship is easily expressed  as a ratio which  can be
             estimated. According to Haven et. al. (1981) long run trends indicate that
             the bay-wide average for this ratio is  1: 1 or one bushel of market oysters
             harvested for every bushel of seed planted.   This ratio does, as one might
             expect,  vary  depending on the  receiving system.    A lack of  data  made
             quantitative estimation of the seed-market oyster relationship impossible
             to determine on  a river system by  river system basis.   This  problem was
             overcome by asking VMRC repletion officers to rank each river system

             1.                                  ~~~~~~~~~~~-86-

             relative to the 1: 1 ratio. Based on their personal experience in the field
             each river system  was ranked according to its  relative productivity.    In
             several instances it was possible to obtain quantitative estimates of the
             seed-market oyster relationship  for specific river systems.    Using these
             quantitative estimates and the qualitative rankings, it was possible to
    U      ~ ~estimate a  seed-market oyster ratio for  each river system on  both public
             and  private  grounds.    The   actual  seed-transplant-harvest  production
             coefficients were estimated by multiplying the seed-market oyster ratios
             for each river system by seed planting rates for public and private
     N       gr~~ltoughs     the  1: 1  ratio  claimed by  Haven  is  confirmed  by  other
    U       ~~researchers (Bailey and Biggs, 1968)  and is quite often cited as being the
             industry standard, there exist no attempts in the literature surveyed to
             estimate this ratio by different rive-r systems.   The problem comes down to
    I      ~ ~a lack  of   data.    This  data  problem  relates   particularly  to  the
             unavailability of bar-specific  harvest data.   It is  known,  for example,
             where VMRC places its shall but without bar-specific harvest data it is not
    I      ~ ~possible to determine the quantity of market oysters which were produced as
             a result of that repletion effort.
                  The second market oyster producing activity is the shell-harvest
    I      ~ ~activity.   Ideally  a similar  ratio comparing  bushels of  market oysters
             harvested to every bushel of shall planted should be used.   Unfortunately,
             as before, the data necessary to calculate this ratio is lacking and VMRC
    I      ~ ~personnel  were unable  to rank  or estimate  the shell-seed-market  oyster
             relationship for any of the river systems considered in the model. What is
             required is an estimator for this relationship that can serve as a suitable
    I      ~ ~proxy for the shell-seed-market oyster relationship.
                  The purpose of shelling oyster bottoms is to ensure that oyster larvae
             have a suitable substrate upon which  to attach.   Shelling oyster bottoms,
             if done at the appropriate time, enhances the possibility that a successful
             strike of seedling oysters will result.   If the assumption is made that an
             oyster bar repleted by shelling is at least as productive as an unrepleted
    I        I~~naturall  bar and if it is possible  to determine the per acre adult oyster
             population density on the unrepleted bar then,   it may be assumed that the
             adult oyster population on the unrepleted bar provides a lower bound to
    I      ~ ~mature oyster densities on the  repleted bar.   Fortunately,  mature oyster
             per acre population densities are reported by Haven et. al. (1981). In the
            manner described above these population density estimates were used as
            proxie s for the shell-seed-market oyster relationship.

           .1                                   ~~~~~~~~~~~~-87-

        The final coefficient to be discussed here is denoted by SP in Figure
    A.4.    These  coefficients represent  the  quantity  of seed  produced  by
    shelling and acre of seed bed. Once again Haven et. al. (1981) was relied
    upon for estimates for these coefficients.    The lack of quantitative data
    is as much a problem here as it was for the previous two coefficients.
    Like the seed-transplant-harvest productivity coefficients, the shell-seed
    productivity coefficients involve  estimating a ratio.   Here  the ratio is
    bushels of seed oysters produced per 100 bushels of shell planted.    Shell-
    seed ratios are reported in Haven et. al. (1981) only for the Piankatank
    and the Great Wicomico. Both of these river systems were not productive of
    seed prior to intensive shelling efforts on the part of VMRC. This unusual
    situation allowed Haven et. al. to estimate the shell:seed ratios for these
    two systems by making the assumption that all seed produced in these river
    systems was attributable to VMRC's shelling activities.

         Similar situations, however, do not exist for the James, Corrotoman or
    Mobjack Bay areas.   Shell:seed ratios for these systems were determined by
    ranking all the river systems in terms of their historical production and
    importance as a seed area.   This ranking (from most to least important) is
    as follows: James, Great Wicomico, Piankatank, Corrotoman and Mobjack Bay.
    As stated earlier, quantitative estimates of the shell:seed ratio exist for
    both  the   Great  Wicomico  and  the   Piankatank  rivers  (1:5   and  1:7
    respectively). The James has been and remains the most important seed area
    in the Virginia portion of the Bay.   For this reason, the shell:seed ratio
    for  the James  was  set  higher than  either  the  Great Wicomico  or  the
    Piankatank  at  1:4.   Neither  the  Corrotoman  nor  the Mobjack  Bay  are
    currently productive of seed but could possibly be brought into seed
    production if VMRC chose to shell these areas heavily (Haven et. al. 1981).
    The  seed  production  potential  of  these  systems  is  unknown  and  the
    shell:seed ratios for these areas were, therefore, set arbitrarily low at
    10:1.   The actual shell-seed production  coefficient for each river system
    was estimated by multiplying the shell:seed ratios by the number of bushels
    of shell planted on firm Baylor grounds*.

    *The shelling rate for firm bottoms was chosen because it reflects the
    minimum  amount  of shell  required  to  provide sufficient  quantities  of
    exposed shell to  ensure satisfactory spat settlement.    The shelling rate
    for soft bottoms includes additional shelling to firm up the bottom.   this
    shell becomes  buried and is  not available as  a setting material.    As a
    result, shell:seed coefficients would be biased upwards because of the
    additional non-productive shell.

                                       -88-.

    I
    I
    I
    I
    |I                              -Appendix B
                              Demand For Chesapeake Bay Oysters
    I Oral Capps and Leonard Shabman

    I
    I
    I
    I
    I
    I
    I
    I
    I
    I
    I
    I                                                    -89-
    I

           I                                 ~~~~~~~~~~Appendix B

                                 Demand For Chesapeake Day Oysters
                                  Oral Capps and Leonard Shabman

                 This appendix reports upon an econometric demand model estimated for
            Chesapeake Bay oysters. The model structure and estimations were developed
            during  1984.   During  1985 and  1986 attempts  were made  to secure  -data
            suitable for  updating the  model.   However,  retail  price series  are no
             longer available and time lags in publication of data for other variables
            made model updating infeasible.
            Seti  j.Q:  General Background

                 The model was estimated using time series data to identify demand
             relationships for Chesapeake Bay (both Maryland and Virginia) oysters.   No
             consideration is given to oyster price differentials by state or by
            grounds.   There was little evidence that average ex-vessel prices differed
            by state, however, there is some evidence that prices may differ by grounds
    U       ~~type (JLARC, 1983).

                 The estimation of a demand system independent from the supply sector
             is justified by the nature of the commercial oyster harvest industry.
    I      ~ ~First,  the supply is determined completely within the harvest sector;  the
             retail and wholesale  sectors merely accept the given supply,   they do not
             determine it.   Second,  the harvest in  a particular year is determined by
             the costs of harvesting in that year (which the fisherman presumably knows
             before harvesting) and the ex-vessel prices received in previous years. It
             is  assumed  that   individual  fishermen  use  previous   prices  to  form
             expectations of current prices, which they further use to decide (along
    *       ~~with knowledge  of current  costs)  whether  or not  to participate  in the
             season'Is harvest; once they have decided to do so, they harvest as much as
             they can,   regardless of the price  they are receiving for  their harvest.
             These two factors together imply that demand and supply can be modeled
             separately, since the current price has no effect on current supply.

                  Third, consumer demand for oysters is price-dependent; i. e. , instead
    I     ~ ~of the market price determining the  quantity purchased,  with the quantity
             purchased variable and the pricer fixed (at a market-clearing level), it is
             assumed  that in  seafood markets,   a  fixed quantity  (determined by  the
    I      ~ ~harvest sector)  of  the product reaches the market,  and  this quantity is
             priced to clear the market.   Thus,  the dependent variable in the consumer
             (retail) demand equation is not the quantity of oysters purchased, but the
    I      ~ ~retail  price;   as in  traditional  demand  theory,  however,   prices  of
             substitute (e.g., other meat, poultry, and fish products) and complement
             (products,   income,  and  other  economic  and demographic  factors  could
    *       ~~influence the dependent variable.

             I                                   -~~~~~~~~~~~~90-

                  Fourth, and finally, the approach to modeling oyster demand assumes
             that  retail,   wholesale,    and  ex-vessel  prices  are   all  determined
             simultaneously;  i. e. ,   each price appears on  the right-hand side  of the
             equations explaining the other prices.   This simultaneous determination of
    I      ~ ~prices is in  large part due to the  fact that the price  equation for each
             sector is in reality not a demand equation for that sector but a reduced
             form equation for the sector, a combination of the corresponding demand and
             supply  functions:   the  wholesale  price equation,   for  example,  is  a
             combination of the equation explaining the demand for wholesale seafood
             (which is determined largely by the retail demand, as represented by the
             retail price)   and the  supply of wholesale  seafood (which  is determined
    I      ~ ~largely  by  the cost  of  producing  seafood  at  the wholesale  level  as
             represented by the ex-vessel price, which is the cost of the raw input used
             in the wholesale sector).   Together, along with consideration of the model
    I      ~ ~requirements,  these  four factors led to  development of an  oyster demand
             model which is developed separately from supply and the demand model
             comprises  a   set  of  three   simultaneous  equations,    explaining  the
    3       ~~corresponding retail, wholesale, and ex-vessel prices.

                  Model requirements and economic theory together were used to determine
             the overall structure of each model; i. e. , they determined the types of
    I      ~ ~variables to be  included in each model,   as well as how  in general these
             variables  would  relate  to  one another.    Final  specification  of  the
             variables and functional relationships depended in large part, however,
    I      ~ ~upon consideration of factors peculiar  to the species under consideration,
             the importance of the Chesapeake Bay harvest of these species relative to
             harvests  from  other  regions,   and  a   number  of  other  economic  and
             institutional factors.   In general, these factors fill in the "holes" that
             model requirements  and economic  theory cannot  fill;  for  example,  they
             determine whose disposable income should appear in the retail price
    3       ~~equations as a determinant of consumer demand.

                  Oyster markets extend outside of the Chesapeake Bay area; i. e. , the
             product is sold not only in the Maryland-Virginia-Washington, D.C. area,
    I      ~ ~but elsewhere in the United States.   Thus, the retail and, to a lesser but
             still  significant extent,   wholesale  prices  for Chesapeake  Bay  oyster
             products  are set  in  national markets;   retail demand  is  thus in  part
             determined by national disposable income, the national average prices of
             other goods, and other national economic and demograpdhic variables.
                  The structure of the ex-vessel market varies considerably, depending
    I      ~ ~on species.    Chesapeake Bay  oysters are  relatively homogeneous;   i. e.,
             Maryland-harvested oysters and Virginia-harvested oysters are largely
             indistisnguishable.    Because  of  this,   ex-vessel  prices  for  oysters
    I     ~ ~harvested in the two states are nearly identical.  Only one ex-vessel price
             equation is needed for the oyster model.

             I                                   -~~~~~~~~~~~~91-

    Section 2.0: Chesapeake Bay Oyster Demand

         Because of the interdependency between Maryland and Virginia in oyster
    processing and distribution, a single system of demand equations is
    developed for Chesapeake Bay oysters.   Equations (1) to (3) represent this
    demand system.   Prices at three separate levels of the oyster industry are
    explained:    consumer or  retail  level,   intermediate or  wholesale  and
    processor level, and production or ex-vessel level.

              RPOY = i(WPOY, C, Y, CPIMPF, POP, TIME)             (1)

              RPOY = j(RPOY, OYEXVP, QBAY, QSG, IIGS, TIME)       (2)

            OYEXVP = k(RPOY, WPOY, QBAY, TIME)                    (3)

         where:

          WPOY = nominal retail price of oysters (standards) at Baltimore,
                 Maryland (dollars per pound)
              C = total consumption of U.S. oysters including western oysters
                  and imports (millions of pounds)
              Y = nominal total disposable personal income in the United
                  States (billions of dollars)
            CPI = consumer price index of meat, poultry, and fish
                  (1967 = 100)
           WPOY = nominal wholesale price of oysters (standards) at Norfolk,
                  Virginia (dollars per pound)
           QBAY = landings in the Chesapeake Bay (millions of pounds)
            QSG = landings in the South Atlantic and the Gulf (millions of
                  pounds)
           IIGS = index of cost for intermediate goods and services (1967 = 100)
         OYEXVP = nominal ex-vessel price of oysters, weighted average value
                  of Maryland and Virginia landings (dollars per pound)
            POP = civilian population of the United States (millions)
           TIME = time trend.

         The relationships among ex-vessel, wholesale and retail prices depend
    upon consumer demand, product supply and costs of marketing (Gardner 1975;
    Heien 1980).  Specifically, retail price influences wholesale and ex-vessel
    price, wholesale price influences retail and ex-vessel price, and ex-vessel
    price,  influences wholesale  price.   The interdependent nature  of oyster
    price  determination  constitutes  a  simultaneous   system  in  which  the
    endogenous variables are the market prices at the three levels in the
    marketing chain.   However, it does not follow from this that prices at the
    three levels necessarily change together.

         The time divisions used in this analysis are probably the major
    contributors to the simultaneity of the determination of price levels.
    With data  for short time  units,  a recursive  or causal chain  system for
    price determination might be more  appropriate than a simultaneous equation

                                       -92-

             system.   However, in this case, the data interval corresponds to one year,
    3        ~~and hence, the simultaneous system is preferable.

                  Implicit in this system is a price dependent demand (Fox 1953; Waugh
             1964)  for  oysters.   Chesapeake Bay landings  in any time period  are not
    I      ~ ~responsive to  current ex-vessel prices  because harvest effort  (labor and
             seed planting)   responds to price  with a time  lag.   A similar  logic is
             presumed to apply to landings outside the Bay region which also may respond
             to prices with a  time lag.   Thus,  landings and total  consumption in any
             year are treated as being exogenous when estimating the parameters in the
             model.    Total consumption  is set  equal  to total  U. S.   landings  plus
    *        ~~imports.

                  It is hypothesized that in the retail price equation, the coefficient
             on consumption is negative, reflecting the usual inverse relationship to
    I      ~ ~price.    The  coefficient  on  income  is  hypothesized  to  be  positive,
             reflecting the arguement that oysters are normal goods. CPIMPF is an index
             used to measure the price of substitute products such as meat, poultry,
    I      ~ ~fish, and shellfish;   As such, it is hypothesized to be positively related
             to the retail  price of oysters.   -Also,   similar to income and  prices of
             substitute products, time and population are hypothesized to be positively
             related  to retail  price.   The  wholesale price  is also  expected to  be
             positively related to retail price.
                  At the wholesale level, it is hypothesized that Bay landings and South
    I      ~ ~Atlantic and  Gulf landings  have inverse impacts  on the  wholesale price.
             Therefore,   the   coefficients  are   expected  to   be  negative.        The
             unavailability of time-series data on wholesale cost components led to the
             use of the index of intermediate goods and services (IIGS) as a proxy
    H       ~~variable for marketing  costs other than raw materials.    IIGS  is an index
                devloedby  the USDA to  measure trends in  marketing costs for  the food
             processing sector.   As such,  it can be  assumed to represent costs in the
             oyster processing sector.    Ex-vessel prices,  which are  the raw material
             costs,  are expected to be positively  related to wholesale price.   Retail
             price is also hypothesized to be positively related to wholesale price.
             The coefficient on the time trend variable is hypothesized to be positive,
             reflecting a general upward price trend over the period.

                  In the ex-vessel price equation it is expected that landings will be
             inversely related  to price.   Coefficients  on wholesale price  and retail
             price are expected to be positive.   The time trend variable is expected to
             be negative to reflect the fact that nominal ex-vessel prices over the time
             period did not rise with general inflation trends.
                  The demand model was estimated using annual data for 1960 to 1980.
    I      ~ ~Collecting historical  data for  each of  the variables  identified in  the
             model specification step was required to estimate the parameters of the
             equations. Fisheries-specific information on prices was collected from the
     I      ~ ~Shellfish Market  Review and the Fishery  Statistics of the  United States,
             both  published  annually (or  more  frequently)   by the  National  Marine

             I                                   ~~~~~~~~~~~~-93-

    Fisheries Service, a division of the U.S. Department of Commerce.   Data on
    national income, interest rates, consumer price indices, and other national
    economic and demographic variables were obtained from various Department of
    Commerce and Department of Agriculture  publications.   In general,  annual
    data for the 1960-1981 period were obtained.

         Ordinary  least squares  (OLS)   could not  be  used  to estimate  the
    parameters of the demand sub-models because of the simultaneous structure
    of these  submodels. In  the situation  where two  or more  variables are
    jointly determined in a set of structural equations, as is the case here
    (where the retail price determines the wholesale price, and the wholesale
    price determines the retail price, etc.) OLS produces coefficient estimates
    that are biased (i.e., the expected value of the parameter estimate is not
    the true  parameter value).   To overcome  this bias,  the  two-stage least
    squares  (2SLS)   estimation   technique  was  employed  to   estimate  the
    parameters.    This   commonly  employed  statistical   technique  produces
    coefficient estimates that are assymptomatically unbiased (i.e., unbiased
    for very large samples), and that are also less biased for finite samples
    than are the corresponding OLS coefficient estimates. However, attempts to
    estimate the simultaneous equation system using the traditional methods of
    two-stage and three-stage least squares were plagued by deleterious
    collinearity problems.  The presence of collinearity in the first stage and
    the second stage regressions was confirmed by examination of the singular
    value  decomposition  of  the   data  matrix,   the  variance-decomposition
    proportions, and the variance inflation-factors (Belsley, Kuh,  and Welsch,
    1980).    According  to  Belsley,   Kuh,    and  Welsch,   strong  variable
    intercorrelations,   which ultimately  lead  to  degradation of  structural
    parameter estimates, exist in the case of condition indices in excess of
    30, variance-decomposition proportions in excess of 0.5, and variance
    inflation factors in excess of 10. These various measures not only provide
    reference points to determine the seriousness of the collinearity problem
    but also  pinpoint the  variables that share  in the  collinearity.   Also,
    these measures constitute generalizations of the traditional detection
    devices  of  collinearity,   namely,   the   use  of  pairwise  correlation
    coefficients of the data matrix and the use of eigenvalues and eigenvectors
    of the matrix of correlation coefficients.    Not surprisingly,  due to the
    nature of the data, almost all the variables in the simultaneous equation
    model participate in the collinearity.

         To overcome the effects of collinearity in the simultaneous equation
    system, this study employs the adaptation of ridge regression with two-
    stage least squares (Capps,  1982;  Vinod  and Ullah,  1982;  and Maasoumi,
    1980).    Although successfully  used in  economic research  to reduce  the
    effects of collinearity in single-equation applications (Brown, 1973; Brown
    and Beattie,  1975;  Vinod,  1976;  Watson  and White,  1976;  Moscardi and
    deJanvry, 1977; Belongia, 1979), the use of ridge regression in conjunction
    with simultaneous systems has rarely  been previously attempted.   However,
    the adaptation of ridge regression with two-stage least squartes provides a
    reasonably straightforward method to potentially improve the structural
    estimation of simultaneous models.

                                       -94-

                 In this application, the ridge regression modification occurs in the
            second-stage  estimations,    where  the  emphasis  lies   with  structural
            estimation.   The  first-stage estimations  are oriented  towards obtaining
            predictions  of   right-hand  side  endogenous  variables,    wherein  each
            endogenous variable is expressed as a function of all predetermined
            variables in the models.   Consequently,   given the emphasis on prediction
            rather than on structural estimation in the first-stage estimations, the
            ridge regression modification to circumvent the collinearity problem occurs
            onl~y in the second-stage estimations.

     I           ~~~In  brief,   the procedure  entails  the  addition of  small  positive
            increments,  k-values,   to the  correlation matrices  of the  second-stage
            equations.   The selection of the k-values  for the respective equations is
            based on the Ridge Trace (Hoerl and Kennard,  1970).   The Ridge Trace is a
            plot of the structural coefficients versus various k-values. The choice of
            the k-values is indicated by the point at which the structural coefficients
            begin to stabilize.   A draw-back to this  criterion rests on the fact that
            the k-value selection process is subjective.
                 The interaction of ridge regression with two-stage least squares
    I      ~~reduces  the  effects  of  collinearity,  thereby  making  it  possible  to
            partition the separate effects of the various factors influencing the
            nominal price at each level of  the marketing chain.   Structural parameter
    I      ~ ~estimates of the equations are exhibited in Table B. 1.  The standard errors
            of the coefficients of each equation are placed in parentheses below the
            coefficients. .Although conventional tests of significance are not exactly
            applicable to parameters obtained from estimating simultaneous equation
    I      ~ ~models,  the estimated  structural parameter is judged  to be significantly
            different from zero when the ratio of the parameter estimate to the
    *       ~~associated estimate of standard error is greater than two.

                 All estimated coefficients in the model have signs consistent with
            prior theoretical expectations. The model explains approximately 99 percent
            of the variation in the retail and wholesale prices of oysters and over 90
    U       ~~percent of the variation in ex-vessel price.  The conventional goodness-of-
            f it statistic,  R2,   for each of the three equations is  the square of the
    *       ~~Pearson product-moment coefficient of actual and predicted prices.

                 Durbin  (1957)   and   Malinvaud  (1970)   have  suggested   that  the
            conventional single-equation Durbin-Watson statistic be used to check for
    I      ~ ~serial correlation  of disturbances in  the simultaneous  equation setting.
            The appropriate number of degrees of freedom is (k,T) where K is the number
            of predetermined variables used in the first-stage estimations and T is the
    I     ~ ~number of observations.   For this application,  K  = 8,  and T = 21.   The
            Durbin-Watson statistics are 0. 7703 for the retail price equation, 1.2658
             for the wholesale price equation and 1.0085 for the ex-vessel price
             equation.    The null hypothesis of no  autocorrelation is not rejected for
             any of the equations.

             I                                   -~~~~~~~~~~~~95-

         Table B.1.  Demand Estimation:  Chesapeake Bay Oyster Industry

             Retail Price     Wholesale Price      Ex-Vessel Price
                 (RPOY)            (WROY)              (OYEXVP)

    Intercept    -0.6186              0.3393             0.5927*
                (0.3584)           (0.2140)             (0.1415)

    RPOY                             0.1720*              0.1348*
                               (0.1732E-01)        (0.2010E-01)

    WPOY         0.6250*                                  0.3714*
            (0. 5564E-01)                           (0.4706E-01)

    OYEXVP                           0. 5434*
                                (0.8665E-01)

    QBAY                         -0.5195E-02         -0.1332E-01*
                                (0.4910E-02)        (0.5219E-02)

    QSG                          -0.8241E-02
                                (0.4325E-02)

    IIGS                        0.1605E-02*
                                (0.3574E-03)

    TIME     0.1700E-01*         0.1290E-01*         -0.1870E-01*
             (0.2445E-02)       (0.2977E-02)         (0.4181E-02)

     C        -.07191E-03
             (0.3702E-02)

     Y        0.4650E-03*
             (0.3288E-04)

     CPIMPF   0.5237E-02*
             (0. 7357E-03)

     POP      0.3971E-02*
             (0.1578E-02)

     R2            0.9908              0.9881               0.9197
     D-W           0.7703              1.2658               1. 0085
     U2            0.6647              0.7621               1. 1532
          K          ~~~0. 10             0. 05                0. 05

      *Indicates significance.

                                     -96-

                  Overall,   the Theil  U2  statistics for  the  market price  equations
             indicate  that  the model  is  unequivocally  better  than the  naive,   no
             extrapolation model.   The  U2 statistic for the no  extrapolation model is
             unity.   While  no rigorous test  has been  developed to judge  whether the
      ~~difference between two  U2 coefficients is statistically  significant,  all
             but one of the U2 coefficients of the model are much lower than the U2
             coefficients of  the naive  no extrapolation  model.   The  range of  the U2
             coefficients for the retail, wholesale, and ex-vessel price equations range
             from 0. 6647 to 1. 1532.
                  In summary, the retail price of oysters is responsive to the wholesale
    I      ~ ~price;  income;   the general  price level  for meat,   poultry,  fish  and
             shellfish;  population;  and the time trend.    The key determinants of the
            wholesale price of oysters are the retail price,  the ex-vessel price,  the
             time trend, and marketing costs.  The ex-vessel price of oysters in the Bay
             is responsive to Bay landings, the retail price,  the wholesale price,  and

     I           ~~~~The impact of  exogenous variables on prices at each  market level are
             determined from the analytically derived,   reduced form equations.   These
             are reported in  Table B.2.   It is the analytically  derived reduced forms
    I      ~ ~multipliers which are used in the price simulation for the primary analysis
             of this report.

            I~~~~~~~~~~~~-7

                                     Table B. 2

                    Analytically Derived Reduced Form Equations
                         for Chesapeake Bay Oyster Demand

     RPOY = 0.124665 - 0.0120494 QBAY - 0.00798671 QSG + 0.00155547 IIGS

             + 0.0236945 TIME - 0.000890018 C + 0.000575522 Y

            + 0.00648174 CPIMPF + 0.00491484 POP

     WPOY = 0.790295 - 0.0192791 QBAY - 0.0127787 QSG + 0.00248876 IIGS

             + 0.0107112 TIME - 0.000273468 C + 0.000176836 Y

             + 0.00199159 CPIMPF + 0.00151014 POP

    OYEXVP = 0.869411 - 0.0221045 QBAY - 0.00582263 QSG + 0.001134 IIGS -

             0.115278 TIME - 0.00022154 C + 0.000143257 Y + 0.00161342

             CPIMPF+ 0.00122339 POP

                                       -98-

    I
    I
    I
    I
    I                                                      Appendix C
             |I~~~~~ ~~The Budget Simulator

    I
    I
    I
    I

    I

    I
    I

    I
    I
    I
    I
    I                                                         -99-
     l

                                            Appendix C

                                       The Budget Simulator

            Section 1. 0: Budzet Format

     I           ~~~The  net  returns figures  for  private  planters and  public  grounds
            harvesters shown in Section 6 of Appendix A, Part 2 were estimated with a
            budget simulator.   The  budget simulator employs a  spreadsheet program to
    I      ~ ~evaluate changes  in net  returns associated  with a  policy change.    The
             spreadsheet  program allows  the  use of  a 'fixed-format  budget in  which
             formulae are imbedded for each budget item.   The individual components for
    I      ~ ~each  budget item  are listed  outside of  the budget  format.   Table  C. 1
             illustrates the spreadsheet format for the private planter budget.

                  Lines 1 through 25 of Table C. 1 comprise the budget portion of the
             spreadsheet. The budget formulae are listed in column 2 of Table C. 1. The
            budget components in each formula are identified by a row and column
             nmber.   For example, the formula in row 4 column B is 1xB33.  This means
            tha the cost per bushel of planting seed is I multiplied by the value that
             appears in row 33 column D. Lines 31 to 41 are the names and values of the
            budget items. These values are choice values that set the parameters under
    I      ~ ~which net returns are to be computed.   Given these values, the spreadsheet
             program  performs  all the  computations  indicated  in the  budget.    The
             resulting computed budget for the selected parameter values shown in Table
             C. 1 is shown in Table C. 2. The data sources for the parameter values shown
             in this appendix are discussed in Section 2. 3 of Appendix A, Part 2.
                  The impact on net returns under any given management policy may easily
             be assessed by adjusting the budget parameters to reflect the conditions
             that would exist under the new policy.

     3           ~~~In a  similar fashion  to that  described above,   budgets for  public
             grounds tongers and dredgers can be formulated.   The budget format and the
             a sample computed budget for a representative public grounds tonger is
    3       ~~presented in Tables C.3 and C.4 respectively.  Likewise, Tables C.5 and C.6
             present the budget format and sample computed budget for a representative
             dredge harvester.

             I                                   -~~~~~~~~~~~100-

                        Table C. 1

       Budget Spreadsheet Format for a Representative
                Private Grounds Planter

           |I       A            II           B
    1                             Seed Planting Cost/bu.
    2
    3
    4   Seed Planting Cost                   1 x B33
    5   Seed Purchase Price                  1 x B34
    6   Seed Transport Price                1 x B35
    7   Seed Tax Rate                       1 x B36
    8
    9   Total per Bushel Cost         B4 + B5 + B6 + B7
    10
    11
    12                            Cost per Acre
    13
    14  Total Planting Cost                 B9 x B39
    15  Harvest Cost                        B38 x B37
    16
    17  Total Cost                          B14 + B15
    18  Average Cost                  (B14/B15) x (B38 x B41)
    19
    20                            Returns Per Acre
    21
    22  Bushels Harvested                    1 x B38
    23  Pounds of Meats Yielded             B38 x B41
    24
    25  Total Returns                       B23 x B40
    26  Net Return                          B25 - B17
    27  Average Net Return                  B26/B23
    28
    29
    30
    31                            Budget Parameters
    32
    33  Planting Cost per bu.                            .55
    34  Seed Cost                                       2.38
    35  Seed Transport                                 .3685
    36  Seed Tax                                          .1
    37  Harvest Cost                                   1.602
    38  Productivity                                     750
    39  Bushels of Seed Planted                          750
    40  Ex-Vessel Price/lb.                           .85889
    41  Convert Bu. to Lbs.                           4.5919

                                        -101-

                                  Table C. 2

                  Per Acre Returns to Fixed Costs and Management
                       For A Representative Private Planter

                               Seed Planting Cost/bu.

             Seed Planting Cost                              .55
             Seed Purchase Price                            2.38
             Seed Transport Price                          .3685
             Seed Tax Rate                                    .1

             Total per Bushel Cost                        3.3985

                                 Cost per Acre

             Total Planting Cost                        2548.875
             Harvest Cost                                 1201.5

             Total Cost                                 3750.375
             Average Cost                          1.08898277402

    I                             ~~~~~~~~~Returns Per Acre

             Bushels Harvested                               750
             Pounds of Meats Yielded                    3443.925

             Total Returns                         2957.95274325
             Net Return                            -792.42225675
             Average Net Return                   -.230092774015

                                               -102-

                               Table C.3

              Spreadsheet Budget Format for a Representative
                       Public Grounds Hand Tonger

            |I  ~      F               1i  G
    1                                  Annual Hand Tonger Budget
    2
    3
    4   Nomlhal Variable Costs
    5        Vessel Maintenance              1 x G26
    6        Gear Maintenance                1 x G27
    7        Fuel                            G28 x G29 x G30
    8        Wages                           G31 x G32
    9        Miscellaneous                   1 x G39
    10
    11  Total Nominal Variable Cost          G5 + G6 + G7 + G8 + G9
    12  Real Variable Cost (1983 $)          (Gll/G37) x G38
    13
    14
    15  Returns
    16       Annual Catch, (Pounds)          G33 x G36 x G30
    17       Total Revenue                   G16 x G35
    18       Net Revenue                     G17 - G12
    19       Repletion Taxes Paid            G33 x G34 x G30
    20       After-Tax Net Revenue           G18 - G19
    21
    22
    23
    24                                  Budget Parameters
    25
    26  Vessel Maintenance                                           85
    27  Gear Maintenance                                             35
    28  Fuel Price, ($/Gallon)                                       .5
    29  Fuel Usage, (Gallons/Day)                                   2.2
    30  Days Fished                                                  75
    31  Wage Rate, ($/Hour)                                           3
    32  Hours of Labor Hired                                     113.11
    33  Daily Catch, (Bushels)                                       20
    34  Market Oyster Repletion Tax                                  .5
    35  Ex-Vessel Price                                          .85889
    36  Coversion Rate (Pounds/Bushel)                           4.8833
    37  CPI 1961                                                   .896
    38  CPI 1983                                                  2.984
    39  Miscellaneous Expenses                                        0

                                        -103-

                       Table C.4

        Annual Returns to Fixed Costs and Management for a
          Representative Public Grounds Hand Tonger

    Nominal Variable Costs
         Vessel Maintenance                                     85
         Gear Maintenance                                       35
         Fuel                                                 82.5
         Wages                                              339.33
         Miscellaneous                                           0

    Total Nominal Variable Cost'                            541.83
    Real Variable Cost (1983 $)                      1804.48741071

    Returns
         Annual Catch, (Pounds)                            7324.95
         Total Revenue                                6291.3263055
         Net Revenue                                 4486.83889479
         Repletion Taxes Paid                                  750
         After-Tax Net Revenue                       3736.83889479

                                    -104-

                             Table C.5

                 Spreadsheet Budget Format For A
                       Public Grounds Dredger

                               |     ~J      l ~      K
    1                                  Annual Dredge Budget
    2   Nominal Variable Costs
    3
    4        Vessel Maintenance              1 x K24
    5        Gear Maintenance                1 x K25
    6        Fuel                            K26 x K27 x K28
    7        Wages                           K29 x K30
    8        Food                            1 x K31
    9        Miscellaneous                   1 x K32
    10
    11  Total Nominal Variable Cost    K4 + K5 + K6 + K7 + K8 + K9
    12  Real Variable Cost (1983 $)          (Kll/K37) x K38
    13
    14
    15 Returns
    16       Annual Catch (Pounds)           K33 x K34 x K28
    17       Total Revenues                  K16 x K35
    18       Net Revenues                    K17 - K12
    19       Repletion Taxes Paid            K33 x K36 x K28
    20       Net After-Tax Returns           K18 - K19
    21
    22
    23                                 Budget Parameters
    24  Vessel Maintenance                                         1800
    25  Gear Maintenance                                            350
    26  Fuel Price, ($/Gallon)                                       .5
    27  Fuel Usage, (Gallons/Day)                                    14
    28  Days Fished                                                  75
    29  Wage Rate, ($/Hour)                                            3
    30  Hours Hired (Year)                                       1187.5
    31  Food Expense                                                675
    32  Miscellaneous                                                  0
    33  Daily Catch                                                 160
    34  Coversion Rate (Pounds/Bushel)                           4.8833
    35  Ex-Vessel Price                                          .85889
    36  Market Oyster Repletion Tax                                   .5
    37  CPI 1961                                                   .896
    38  CPI 1983                                                  2.984

                                        -105-

                                              Table C. 6

                            Annual Returns to Fixed Costs and Operator Labor
     3                           ~~~~~~~for a Public Grounds Dredge Harvester

                    Nominal Variable Costs

    U                    ~~~~~~Vessel Maintenance                                    1800
                         Gear Maintenance                                           350
                         Fuel                                                       525
    I                   ~~~~~~Wages                                               3562.5
                         Food                                                       675
    I                    ~~~~~~Miscellaneous                                            0

                    Total Nominal Variable Cost                                  6912.5
                    Real Variable Cost (1983 $)23021. 09375

                    Returns
                         Annual Catch (Pounds)                                 58599.6
    I                   ~ ~~~~~Total Revenues                              50330. 610444
                         Net Revenues                                     27309. 516694
                         Repletion Taxes Paid                                      6000
    I                   ~ ~~~~~Net After-Tax Returns                       21309. 516694

          I~~~~~~~~~~~~~16

    U
    I
    I
    I
    I
    I                                                  Appendix D
           ~~~~~I        ~Contribution of the Oyster Industry to the
                                       Virginia Economy and Tax Base
    I
    I
    I
    I
    I
    I
    I
    I
    I
     I
     I
     I                                                     -107-
     I

                                            Appendix D

       I                     ~~~~~~Contribution of the Oyster Indusrty to the
                                   Virginia Economy and Tax Base

            Sectionl 1~.0: Introduction

                 This section provides preliminary estimates of the contribution of the
            commercial oyster  industry to the economy  and tax base of  Virginia.   In
            providing these estimates an appropriate approach to regional economic
             impact analysis can be demonstrated.   The  primary purpose of this section
             is to provide estimates for the simulation model of this report. A second,
             and more long term purpose, is to generally describe the basic framework
             for economic impact analyses in order to illustrate basic data needed for
            making future improvements to such analyses.
             Section _Z.O: Measuring the Regional Economic Impact
                                      of the Oyster Industry
                 The contribution of an industry (economic sector) to the economy of a
             region extends beyond the dollar value of production of that single
             industry.   By its  purchases of labor and materials  from other industries
             and by its sales to other industries the affect of any one industry on the
             economy involves an  interdependence with numerous economic  sectors.   For
    I      ~ ~example,  oyster harvest requires purchase of  inputs from sellers of fuel,
             labor,  and  fishing gear.   Sales of  harvested oysters go  to processors,
             wholesalers or retailers.   All these parties are affected by the fact that
    I      ~ ~the oyster harvest activity exists within the region.  Additionally, income
             paid to households employed by the affected sectors of the economy is, in
             turn,   spent on  a wide  array of  consumer and  investment items  further
             extending the initial effect of the oyster harvest.

                  In this study, estimates of the impact of the oyster industry on the
             Virginia economy are based on a multiplier analysis.   Multipliers indicate
    I      ~ ~the aggregate effects, on the economy of an area (state or region), of some
             level (or change  in the level)  of  a specific industry.   There  are many
             multipliers  from  which  an  analyst   might  choose  depending  upon  the
    I      ~ ~particular measure  used to  evaluate economic  activity--output and  value
             added are the two measures discussed here.

                  An output multiplier indicates the change in industry and business
    I      ~ ~output in  the regional  economy resulting from  a one  dollar change  in a
             specific sector?'s  sales to final demand.    Sales to final demand  are all
             sales to buyers outside of the economy being studied plus sales to
    I      ~ ~households,  governments and  net capital expenditures within  the region's
             economy; final demand excludes sales of a sectors output which are used as
             inputs  by other  firms in  the regional  economy.   Thus,   if the  output
    I      ~ ~multiplier for the oyster industry in Virginia is 2.0, then ~1.O million of
             final demand for oysters results in total output in the states economy of

             $2. 0 million. The problem with this multiplier is that total dollar output
             includes expenditures made by all affected firms to purchase inputs
             necessary for their production.   Thus,    the output multiplier provides a
              gross" rather than "net" income measure.

                  The value-added/output multiplier indicates the effect of a change in
    I      ~ ~final demand  on the  aggregate level of  value-added- -the value  of output
             less the  value of  inputs used.    The concept  of value-added  is closely
             related to the familiar macro-economic measure Gross Domestic Product
             (GDP).   Value added is a better  measure than output of aggregate economic
             activity since it excludes purchases made for inputs and, therefore, is a
              net" income concept.

                  The output and value-added/output multipliers for the Virginia oyster
             industry, used in this appendix, are based on an existing input-output
    I      ~ ~model  for the  Commonwealth.   The  model  was developed  by the  Regional
             Science Research Institute for  the use of Virginia Tech.   It  is based on
             the 1972 input-output model of the United States but has been adjusted to
             reflect the structure of the Commonwealth's economy (Regional Science
             Research Institute, 1981).
                  Input-output, models portray the economic relationships between the
    I      ~ ~various sectors  in an  economy.   Since every  industry must  purchase its
             inputs from other industries, a series of relationships ensue which create
             complex linkages between almost all  sectors.   For example,  consider fish
    I      ~ ~harvest.   This  sector purchases  inputs from  a rather  limited group  of'
             sectors including the agricultural, forestry and fishing services industry;
             the manufactured ice industry; the apparel industry; the ship building and
             repairing industry;  transportation, and certain other services.   However,
    I      ~ ~these industries must, in turn, purchase inputs from other firms.   After a
             few rounds of purchases, almost all sectors will be influenced somehwat by
    *       ~~the original purchases of the fishing industry.

                  Input-output calculates the level of production required from all
             other sectors by a change, for example, in final demand from the oyster
    I      ~ ~harvest sector.   Since each sector is linked to others in a unique manner,
             each sector will generate a unique  multiplier effect.   The original final
             demand for a sector-is commonly referred to as the direct effect while the
    ~~~i      mpacts in affected sectors are referred  to as indirect effects.   The sum
             of sect'oral  outputs (other than the  original final demand)   is therefore
             referred to as indirect output.   Input-output models generate estimates of
    *       ~~output multipliers by calculating the following ratio:

             Output =      direct output + indirect output
             Multiplier----------------
          I                      ~ ~~~~~~direct output
                  Input-output models assume that all expenditures for purchased inputs
     *       ~~by firms are constant proportions of their output.   Therefore,  the levels
             of value-added are fixed as a proportion of the output levels of each

                                                -109-

             sector.   Thus it  is possible to develop a multiplier  which indicates the
             value added in the economy stemming from a level of final demand in a
             particular sector.
             Value-added/Output =direct value-added + indirect value-added
          -  Multiplier---------------------
            U                                   ~~~~~~~~~~~direct output

                  The value-added/output multiplier can be used as an accounting device
    I      ~ ~to divide  existing state  GDP among  the various  economic sectors  in the
             states economy.   Specifically,  given final demands for each sector in the
             states economy and a sector's value-added/output multiplier, the value
    I      ~ ~added  in  the economy  derived  from  each  sectors  final demand  can  be
             computed.    Summing these  value-added  impacts  across all  sectors  will
             closely approximate the  GDP for the state.   However,  it  does not follow
    I      ~ ~that elimination of  the industry would reduce state GDP  by the calculated
             amounts because the resources used in production would be diverted to some
             alternative use..   It would only  be the case that  GDP would fall  by the
             calculated amount if all labor and capital inputs used in the affected
             industries had no value in any other use.

             Section 3.0: Virginia' s Commercial Oyster Industry

                  In Virginia the oyster industry includes the harvest, processing and
             distribution  of shellfish  products.   Each  of  these general  activities
    I      ~ ~requires  the purchase  of  production inputs  from  other  sectors of  the
             economy and sale of final products  to other sectors.   These purchase from
             and sales to other sectors set in motion a multiplier effect which results
    I      ~ ~in additional output and  value added in the larger economy  as a result of
             the oyster  industry activity.   Figure D. 1  is a general depiction  of the
             flows of oyster products in the Virginia industry. Harvested products move
             either to consumers through wholesale and retail distribution channels or
    I      ~ ~move to processing  before being delivered to consumers.    In addition the
             processing sector may import products harvested outside the state for
    *       ~~processing.

                  In order to compute the economic contribution of the oyster industry
             to the  Virginia economy three  types of  information must be  known:   (1)
             value and  quantity of  harvest in  Virginia;  (2)   proportion of  harvest
             processed in Virginia and imports to Virginia; and, (3) value of processed
             product.   For  purposes of  this analysis  value and  quantity of  harvest
             information was taken from the simulation model.   However no data exist to
    I      ~ ~determine  how much  of the  harvested  product is  processed before  being
             distributed.   To make such estimates interviews with persons familiar with
             the industry had been conducted.   Also, it was assumed for this study that
    I      ~ ~fifty percent of  the oysters processed in Virginia  are imported (Virginia
             Marine Resources Commission, 1980). It was also assumed that there were no
             imports by wholesalers for further distribution.   Last values of processed
    I      ~ ~oysters were  not available  for recent years  and approximations  of these
             values were made.

                                                -110-

                                     Figure D. I

                   Product Flows in the Virginia Seafood Industry

    [WHOLESALE/RETAIL1              PRI
                __________ I  PROCESSIN I

                                 III ADDITIONAL               IMPORTS OF
                                 [PROCESSING             PRIMARY PROCESSED
                                                             PRODUCT

    ICONSUMER

     Key

     Harvest:    Oyster landings  made at  Virginia  ports for  ultimate use  by
     consumer.

     Imports:   Oysters in  unprocessed condition (or at a  stage of preliminary
     processing) brought into the state for processing prior to distibution to
     wholesale or retail distribution.

     Primary Processing:  Defined here to include shucking of oysters.

     Additional Processing Includes preparation of prepared shellfish products
     to decrease consumer preparation requirements (ex. breaded oysters).

     Wholesale/Retail:    Assembly  and transportation  to  consumers  including
     restaurant and institutional use.

                                        -111-

             Sectionl 4.0: The Multip~lier Effects of Virginia?'s
                                           Oyster Industry

                  Two distinct multipliers were identified for the Commonwealth's oyster
             industry.   These include the multiplier  effects-from:   (1)  seafood sold
             fresh to  households in  Virginia and  buyers outside  the state,   and (2)
             oysters processed in state. The multiplier effects of these activities are
    I      ~ ~provided in Table D.I1.   Oyster marketed through the fresh market generated
             the  largest aggregate  effect on  value-added.    This is  because of  the
             relatively high labor  intensity involved in harvest.   It  is important to
    I      ~ ~keep in mind that these multipliers refer  to dollar units and not physical
             units.   The total  value-added in the economy per pound  of harvested fish
             would be lower for fresh fish than for processed fish since the latter
    I      ~~would  include the  value-added  of the  raw. product  plus value-added  in
             processing.

                  The use of the multipliers reported in Table D. 1 is illustrated by the
    I      ~~following general example.    Assume 200 pounds of product  is harvested in
             Virginia with a dockside value of $100. Fifty percent of the landings move
             on to processing  and the rest is  distributed to consumers.   Thus  $30 of
    I      ~ ~final demand  exists at the harvest  level.   At the processing  sector 100
             pounds of raw product harvested in Virginia is processed to provide 75
             pounds of processed product (25 pounds  are waste).   The processed product
    I      ~~sells for $2.00 per pound yielding a final demand of $150 at the processing
             level.

                  Using the multipliers from Table D. 1, the total effect of these two
    I      ~ ~final demand levels on the economy can be calculated as shown in Table D. 2.
             From Table D.2 it is shown that $100 of landing generated $295.55 of output
    3 ~~and $127.95 of value-added in the regional economy.

             Section 5. 0: Estimated Impacts of the Oyster Industry

                  The  results  for  the  oyster  industry   are  shown  in  Table  D.3.
             Assumptions made for each computation are indicated in footnotes to the
             table.  Output effects are,   of course,  substantially larger  than value-
             added effects from the industry.   However,   the value-added effects are a
             more meaningful measure of the "fnet"? contribution of the seafood industry
             to the Virginia economy.

    I       ~~Section 6.0:    Fuur Research Needs

                  This preliminary economic impact analysis can be improved upon by
    I     ~ ~improvements in basic data about the seafood industry and by refinements of
             the  estimated multipliers  from  the  existing input-output  model.    The
             existing input-output multipliers are for aggregated activities and can
             only be approximations for the more specific activities considered in this
             paper.    For example,   the multiplier  used  for oyster  harvest was  the
             forestry/fishery  multiplier  from  the  existing  model.    Estimation  of

             3                                  ~~~~~~~~~~~~-112-

             multipliers specifically  for individual  species harvest,   processing and
                distibuionactivities  will require primary  survey data  from fishermen,
            processors  and  wholesalers on  (1)   the  expenditures made  for  various
            purchased inputs necessary for their production and (2) the volume and
             distribution of their sales.   Such information can only be gathered from a
             sampl~e of  repr~esentative local  fishermen,  processors,   and wholesalers.
            Thus the cooperation of those whose earn their living from the seafood
    ~~i       ndustry is  necessary if more refined  estimates than those  provided here
             are to be developed.

             Section 7.0: Indirect Ta Revenue from th OyZster Industry

                 The value added to the state economy represents a tax base upon which
             state general tax revenues are earned. For purposes of this study, only an
             approximation of the indirect tax revenues was made.   This estimate begins
             by assuming a definitional identity between reported measures of value
             added from the input  output model and the Gross State  Product.   In fact,
             the accounting relationship between GSP and value added is as follows. GSP
             is the value of all final goods produced in the State; final goods do not
             include products that were used as production inputs into other production
             processing.   GSP  less capital  depreciation allowances  equals net  state
            product (NSP) and NSP is an accounting identity with value added from the
             input-output analysis.

                  There are no published state value added or NSP figures. Therefore, a
             rough identity of GSP and value added was assumed. Data were collected for
             GSP (Cox,  1986)   and total state tax revenue United  States Department of
             Commerce, various years).   With these two data series,  the percent of GSP
             realized in taxes  for years 1980-1984 was estimated  (Table 4).   Applying
             the 1980-1984 average percentage of 13. 784% to the estimated state value
             added from oyster production, yields the indirect tax estimate reported in

             th main text of this report.

                                        Table D. I

                      Multipliers for the Virginia Oyster Industry
                          form the Virginia Input-Output Model

                                                         Oyster
    I                        ~~~~~~~~Harvest*          Process ing**

       Output                   1.417                    1.498

       Value-Added/
       Output                  0.882                    0.599

            *From Virginia  input-output model,   sector 9  (fishery and
            forestry products).

            **From Virginia input-output model, sector 37 (canned and
            curred seafood products); assumes 50 percent of raw products

            to be processed are imported into the state.

                            Table D.2

    Example of Calculation of Output and Value-Added Effects

                             Output

       Processing          .498   *  $150  =  $224.70

      Harvest            1.417   *  $ 50  =  $ 70.85

      Total                                   $295.55

                           Value-Added

       Processing          .599  *  $150  =  $ 83.85

      Harvest             .882  *$ 50  =  $ 44.10

      Total                                 $127.95

                         Table D.3

         Economic Impact of the Oyster Industry

                          Output

    Harvest*                  $986,300  *  1.417  =   $1,397,587

    Processing**           $34,044,006  *  1.498  =  $50,997,920

    Total                                             $52,395,507

                        Value Added

    Harvest*                  $986,300  *   .882  =      $869,916

    Processing**           $34,044,006  *   .599  =  $19,030,599

    Total                                             $19,900,515

    *10  percent of  $9,863,000  value  of oysters  landed  is
    assumed to be distributed without shucking.

    **Assumes one  half of  oyster processed  in Virginia  are
    imported  from  elsewhere (primarily  Maryland);   assumes
    40,000 gallons of shucked oysters are sent to additional
    processing  (breading;  stews,   etc.);   final demand  at
    primary processing equals $33,057,006 based upon price of
    shucked  meats  of  $2.09  per  pound;   final  demand  at
    additional processing equals $987,000 based upon $2.82
    pound for oyster meat after further processing.

                           -116-

                                  Table 4

                Virginia State Tax Revenues as a Percent
                          of Gross State Product

           Virginia GSP        Tax Revenue         Tax Revenue as
           ($ Billion)         ($ Billion)           a % of GSP

    1980     59.113                6.712                11.35
    1981     65.671                7.883                12.11
    1982     71.184                8.643                12.14
    1983     77.860                9.098                11.69
    1984     87.451               10.018                11.46

                              -117-