2. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources 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

3. GEF Allocating Scarce Resources: the Fisheries Optimal fisheries managementOptimal fisheries management “Tragedy of the Commons”“Tragedy of the Commons” Regulation of public fisheriesRegulation of public fisheries Common property resourcesCommon property resources

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

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

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

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

8. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

9. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources Which approach conserves more fish? Goal of traditional fisheries management: achieve MSY Goal of traditional fisheries management: achieve MSY In contrast, the economist aims for MEY In contrast, the economist aims for MEY Relative to MSY, at 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 MEY more fish is conserved

10. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources 2. Tragedy of the Commons: Property rights and environmental degradation Property rights are often not well-defined for environmental resources 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 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

11. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources Tragedy of the Commons Now suppose users act independently and maximize individual profit Now suppose users act independently and maximize individual profit –Because fishery is common pool, MR i = 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 Users keep adding effort until E 0, where AR = c –Rent is completely dissipated, and fish stock is severely depleted

12. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources

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

14. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources Market failure: lack of property rights Fishery is open access: fishers (or herders, etc.) are free to use as much as they wish 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 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

15. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources Example: Costa Rica Illustrates unfolding of “tragedy” after introduction of technology that permits harvesting of unexploited fish stocks 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 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) Analyzed by World Resources Institute in Accounts Overdue (1991)

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

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

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

19. GEF 3. Regulation of public fisheries

20. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources Fisheries regulation options What are options to address open access? What are options to address open access? Options are: Options are: 1.Command-and-control: limit aggregate effort to E MEY or aggregate catch to H MEY 2.Charge: set tax on effort or catch, to eliminate discrepancy between MR and AR 3.Individual tradable quota (ITQ): limit aggregate catch to H MEY, allocate quotas to fishers, allow them to buy and sell

21. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources Command-and-control Regulating quantity of effort Regulating quantity of effort –How to define E i : vessels? days? horsepower? Regulating quantity of catch 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

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

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

24. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources CHARACTERISTICS OF SOME ITQ FISHERIES New Zealand IcelandCanadaChile Year; species1986- 32 species 1979-herring; 1974-demersal 1990-all 1991- all 1992- Red shrimp & cod ITQ Allocation; Cost Fishers; Initially free Vessels; Free Vessels; Free Fishers; Auction BasisHistoricalHistorical, Capacity 70% historical; 30%capacity Auction Property rightsPerpetual, full rights, except lobster, restricted based on share or permit holdings Annual revocable vehicle quota; Restricted concentration & employment Restricted based on concentration Valid 10 years; restricted to share or permit holdings; annual auction of 10% EnforcementAuditing Catch MonitoringWeak; self monitoring PaymentViolation a criminal offense Costs paid by industryPenalties; forfeiture of quotas; informers get share Graduated finds Economic Results Output=0; Employment=0; Fish Quality=+; Quota price=+ Catches=+/0; Effort=- ; Catch quality=+; Profits=+ Catch=0; Prices=+; Employment=- ; Concentration restricted n.a.

25. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources CHARACTERISTICS OF SOME ITQ FISHERIES NorwayAustralia US: East Coast US: Florida Year; species1973 - Herring, mackerel, blue whiting, capelin 1984; southern blue fin tuna 1990; surf clam and ocean quahog 1992- Spiny lobster ITQ Allocation; Cost Vessels; Free Fishers; Free Vessels; Free Fishers; Fixed price BasisCapacity75% Historical, 25% Capacity 80% historical; 20%capacity Historical Property rightsRestricted transfer subject to approval by Ministry of Fish Freely tradableQuotas full propertyRestricted to concentration share EnforcementCatch MonitoringCoastal surveillance, cage tags, logbooks Monitoring of trap tags; inadequate PaymentGraduated findsCosts paid by industry Economic Results Rents increasedCatches/Effort=+; Rents=+; Capital used= - Efficiency, Catch/Vessel, Rent,= +; Excess capacity = - Number of traps= -; Landings = stable; Value of permit = +;

26. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources 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) 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 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 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 Monitoring and enforcement: detailed reporting, satellite tracking, on- board observers

27. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources Issues with NZ ITQ markets Market efficiency 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 44% of total catch leased in 2000 Market capitalization: ~ US$2 billion 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

28. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources Ease of administration Ease of administration –NZ regulators report greater demand for data, less adversarial relationship Quota values depend on information and integrity of system Quota values depend on information and integrity of system –Vs. U.S.: ~100 lawsuits pending against National Marine Fisheries Service Distribution 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. But: most owners continue to be small or medium cos. Which is better: sustainable but concentrated industry, or unconcentrated but unsustainable industry? Which is better: sustainable but concentrated industry, or unconcentrated but unsustainable industry? Issues with NZ ITQ markets

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

30. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources 4. Common property resources: Collective action Is there a need for government regulation? Is there a need for government regulation? Fishers have an incentive to craft an agreement with the following key features: Fishers have an incentive to craft an agreement with the following key features: 1.All fishers agree to limit their effort so that the collective effort does not exceed E MEY 2.The fishers agree to hire someone to ensure that no one cheats (common-pool assumption remains) 3.All fishers receive a share of the rent that remains after paying costs of policing Why doesn’t this self-organization happen? Why doesn’t this self-organization happen?

31. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources Common property: collective action Actually, it does happen: many examples of common property institutions in developing countries, and not just for fisheries 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 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 Our simple model predicted rent dissipation in part because it didn’t allow cooperation or repeated interaction among fishers

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

33. GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Fisheries and Aquatic Resources Summary There are many sustainable management points for renewable resources There are many sustainable management points for renewable resources Economic (rents) and ecological (stocks) characteristics vary among those points 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 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) Various property rights options exist: not just public or individual private, but also collective (common property)