Tuesday, May 20, 2003

Fishy Reasoning

Overfishing is seriously depleting oceanic fish populations, and Ronald Bailey is correct to observe that this is a classic example of the tragedy of the commons. When an asset is owned in common, so that any of a large number of people can use it freely, the asset will almost inevitably get overused. Nobody has an incentive to conserve such resources, because the benefits of using them are private, whereas the costs of using them are public and dispersed over a large group. As Bailey puts it, “A fisher has no incentive to leave a fish in the sea so that it can reproduce because she knows that the next fisher will come along and take it anyway, so she may as well reap the rewards of the catch immediately.” (Aside: I do sympathize with the desire to mix in feminine pronouns to achieve linguistic gender parity, but it strikes me as odd to do it in a profession that is I’ll bet is overwhelmingly dominated by men.)

Bailey also says (and I agree) that there are two ways to deal with a commons problem, regulation and privatization, and the latter – when possible – is generally preferable. For example, privatization has done wonders for elephants in Africa. But privatization is not always feasible, and the oceans are a textbook example. Unless the boundaries of fishing territories are drawn so broadly that schools of fishes rarely cross them, there will still be external costs associated with the decision to catch more fish.

Bailey contends that ocean privatization has worked in some locations, but the mechanisms he cites don’t really qualify as privatization. They are essentially regulatory solutions improved by the injection market forces at the margin. Bailey’s leading examples are Iceland and New Zealand, where fisherman are assigned “individually transferable quotas” (ITQs) that entitle them to a share of the total allowable catch (TAC). ITQs can be traded among fishermen so that a market in the quotas can emerge, and this is what creates the illusion of a privatization solution. But the overall TAC is actually set on the basis of scientific analyses by some body of experts; and though Bailey doesn’t say where this body came from, I’m betting it’s actually either a government agency or a private agency with a government mandate. In other words, we’re talking about a solution that is, at its fundament, regulatory.

Bailey says “The result of privatization is that fishers have a strong incentive to maximize the number of fish in the sea because their allowed catches go up as the fish population increases.” But this is actually no different from the incentive they have in a commons situation. In the commons, if a fisherman chooses to reduce his catch, the benefits (or avoided costs) of doing so are spread out among all fishermen. Being a fisherman himself, he will reap some fraction of that benefit, but not *all* of it, and that’s the source of the problem. And under the ITQ system, that problem remains: if a fisherman releases fish, the benefits will be spread among all holders of ITQs. As a holder of an ITQ, he’ll get some fraction of the benefits, but not all of them. The only thing inducing the fisherman to reduce his catch in the ITQ system, as compared to the commons system, is that he’ll be punished if he exceeds his quota. It’s the regulatory aspect of the system, not the market aspect, that does the heavy lifting here.

My point is not to criticize the ITQ system. As Bailey observes, it seems to be working, and full-on privatization is probably infeasible in this type of situation, at least with current technology. In such circumstances, regulation may be the best available option. The inclusion of a market mechanism for transferring rights among fisherman is useful because, among other things, it assures that fishing rights are allocated to the most efficient fishermen. Similarly, pollution vouchers assure that rights to pollute are allocated efficiently among firms, so that reduction of air pollution is accomplished at the lowest possible cost. But it would be inaccurate to say that the pollution voucher system is privatization instead of regulation. The total quantity of pollution vouchers is set by a regulatory body, just as the total number of ITQs is set by a regulatory body. It’s great to see that market mechanisms are being used to improve the efficiency of regulation – but it’s still regulation.

No comments: