Session 4

1. Session 4 Fisheries and Aquatic Resources John A. Dixon from materials prepared by J. Vincent, T. Sterner, J.E. Padilla, and Marian delos Angeles johnkailua@aol.com World Bank Institute Ashgabad, November, 2005 Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

2. Allocating Scarce Resources: the Fisheries • Optimal fisheries management • “Tragedy of the Commons” • Regulation of public fisheries • Common property resources

3. 1. Simple fishery model • Fish growth is an instantaneous, logistic function of fish stock • XMSY = maximum sustained yield stock • Growth is highest • Catch at F*(X) or lower can be sustained forever • Any catch below this amount (e.g., F1(X)) can be generated by either of two fish stocks, one small and one large • k = carrying capacity Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

4. Convert to economic terms • Change horizontal axis from fish stock (X) to fishing effort (E) • Reverses direction of axis: when stock is low, effort must be high • Change vertical axis to money • Total revenue (TR) • = Price (P) × Catch (H) • Add total cost function: • TC = Unit cost (c) × Effort • Rent = TR – TC Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

5. Optimal management • Suppose only one fisher. How much effort should he apply? • E*, where profit (“rent”) is maximized • MEY: “maximum economic yield” • Note: MEY is left of MSY • Optimal harvest (H*) is less than the MSY harvest • But rent is larger than at MSY Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

6. Marginal analysis • Can show that MEY point is where marginal revenue (MR) equals marginal cost (MC) • For the marginal unit of effort: • Marginal rent = 0 • Average rent > 0 Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

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8. Which approach conserves more fish? • Goal of traditional fisheries management: achieve MSY • In contrast, the economist aims for MEY • Relative to MSY, at MEY: • Fish catch is lower • Fishing profits are higher • Fishing effort is lower • Fish stock is higher • MEY more fish is conserved Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

9. 2. Tragedy of the Commons: Property rights and environmental degradation • Property rights are often not well-defined for environmental resources • “Open access”: e.g., no restrictions on who can use the open seas • Result: “tragedy of the commons” • Economics research indicates that unclear property rights and other institutional factors are the fundamental causes of environmental degradation, and not only more obvious factors like population growth and consumption Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

10. Tragedy of the Commons • Now suppose users act independently and maximize individual profit • Because fishery is common pool, MRi = AR > c at E*: each user perceives that his profit will rise if he increases his fishing effort • But if all users do this, AR declines: it’s not fixed in the aggregate • Users keep adding effort until E 0, where AR = c • Rent is completely dissipated, and fish stock is severely depleted Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

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12. Stock externality • An individual user who adds effort beyond E* ignores an externality that his actions impose on other users • The increase in effort causes a decrease in fish stock • As a result, other users catch fewer fish • In the aggregate, their profits decrease by an amount that more than offsets the increase in the individual’s profit Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

13. Market failure: lack of property rights • Fishery is open access: fishers (or herders, etc.) are free to use as much as they wish • No property rights: no one is excluded • “Everybody’s property is nobody’s property” • When combined with common-pool assumption, result is rent dissipation • “Too many boats chasing too few fish” • Fishers earn only opportunity cost of labor • In developing countries, subsistence wage: poverty Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

14. Example: Costa Rica • Illustrates unfolding of “tragedy” after introduction of technology that permits harvesting of unexploited fish stocks • Gulf of Nicoya was Costa Rica’s most important fishery during 1970s and 1980s, but it rapidly became overfished • Analyzed by World Resources Institute in Accounts Overdue (1991) Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

15. ACTUAL: OPEN ACCESS TARGET: MAXIMUM YIELD (MEY) Indicators PERCENT DEVIATION VALUES FROM MEY 537,900 +106 261,600 FISHING EFFORT (HP) 457,000 -20 569,000 CATCH (MT) 5,958 -20 7,414 RVENUES (Mil. Pesos) 0 -100 7,128 RENTS (Mil. Pesos) EXAMPLE: PHILIPPINES, OVERFISHED SMALL PELAGICS 1948-1991 Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources Source: J.E. Padilla

16. COD • Cod in Atlantic Banks outside Canada richest in the World • Crashed 1992 • 30 000 fishermen unemployed • No sign of recovery after 10 years! Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

17. Iceland shows the way • World Cod catch down 75% since 1968 • 200 mile EFZ hopeful • Private transferable quotas as SHAREs in TAC • TAC decided by biologists Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

18. 3. Regulation of public fisheries

19. Fisheries regulation options • What are options to address open access? • Options are: • Command-and-control: limit aggregate effort to EMEY or aggregate catch to HMEY • Charge: set tax on effort or catch, to eliminate discrepancy between MR and AR • Individual tradable quota (ITQ): limit aggregate catch to HMEY, allocate quotas to fishers, allow them to buy and sell Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

20. Command-and-control • Regulating quantity of effort • How to define Ei: vessels? days? horsepower? • Regulating quantity of catch • E.g., fishery is closed when aggregate catch reaches quota • Inefficient: each user increases effort in order to catch fish before the quota is filled Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

21. Charges • Tax on effort: same problem as regulating quantity of effort • Tax on catch: easier than taxing effort (because catch is easier to measure), but rarely done • Politically unpopular Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

22. ITQs • Seemingly best of the options: limits aggregate catch to MEY level, in a cost-effective way • Low-cost fishers outcompete others for quotas • See James Sanchirico and Richard Newell, “Quota-based fisheries management” (Resources, spring 2003) Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

23. CHARACTERISTICS OF SOME ITQ FISHERIES Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

24. CHARACTERISTICS OF SOME ITQ FISHERIES Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

25. World leader: New Zealand (NZ) • Diverse: short-lived (squid: 1 year) vs. long-lived (orange roughy: 125+ years), inshore (diving) vs. offshore (deep-sea fishing) • Introduced in 1986: 26 species • Today: 45 species; 85% of NZ’s commercial catch • Divided EEZ into species-specific management regions, based on populations • 1 for hoki, 11 abalone • In 200, 275 quota markets • Total quota based on MSY • Individual quotas can be split, leased, subleased, but number that a single company can hold is limited • Monitoring and enforcement: detailed reporting, satellite tracking, on-board observers Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

26. Issues with NZ ITQ markets • Market efficiency • Very active markets: annual average of 1,500 quota sales and 9,300 leases through 2000 • 44% of total catch leased in 2000 • Market capitalization: ~ US$2 billion • Small & medium companies use quota brokers; large companies have quota managers on staff • Prices have risen: fisheries becoming more profitable, especially those that were initially overcapitalized • Monthly quota prices for given species have converged over time Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

27. Issues with NZ ITQ markets • Ease of administration • NZ regulators report greater demand for data, less adversarial relationship • Quota values depend on information and integrity of system • Vs. U.S.: ~100 lawsuits pending against National Marine Fisheries Service • Distribution • Big political concern with ITQs in U.S.: will ITQs hurt small-scale fishermen? • NZ: 37% decline in number of quota owners; 25% of quota markets are “concentrated” • But: most owners continue to be small or medium cos. • Which is better: sustainable but concentrated industry, or unconcentrated but unsustainable industry? Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

28. Fisheries policiesin developing countries • Government objective is typically to increase catch or employment, not to maximize rent • Subsidies are common: boats, engines, gears, fuel, ice-making equipment, fish culture… • How do such subsidies affect effort? catch? crowding? pollution? fishers’ income? Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

29. 4. Common property resources: Collective action • Is there a need for government regulation? • Fishers have an incentive to craft an agreement with the following key features: • All fishers agree to limit their effort so that the collective effort does not exceed EMEY • The fishers agree to hire someone to ensure that no one cheats (common-pool assumption remains) • All fishers receive a share of the rent that remains after paying costs of policing • Why doesn’t this self-organization happen? Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

30. Common property: collective action • Actually, it does happen: many examples of common property institutions in developing countries, and not just for fisheries • Common property  Open access • Long studied by anthropologists, long ignored by economists • Our simple model predicted rent dissipation in part because it didn’t allow cooperation or repeated interaction among fishers Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

31. Attributes of long-enduring CPRS • Recognition of rights to organize • Clearly defined boundaries: resource and users • Congruence • Appropriation rules and resource conditions: • Distribution of benefits of appropriation and costs of rules: • Collective-choice arrangements • Individuals affected by rules can participate in modifying them: • Monitoring • Graduated sanctions • Conflict-resolution mechanisms Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

32. Summary • There are many sustainable management points for renewable resources • Economic (rents) and ecological (stocks) characteristics vary among those points • In the absence of property rights—i.e., in open access—tragedy of commons results: rent dissipation, stock depletion • Various property rights options exist: not just public or individual private, but also collective (common property) Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources