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14. Designing Property Rights for Achieving
Sustainable Development of the Oceans
Basil M.H. Sharp
INTRODUCTION
A number of academic disciplines, including ecology, economics and ethics, have
contributed to the notion of sustainable development as a basis for public policy. This
chapter focuses on the design of property rights for achieving sustainable
development of the oceans. Particular emphasis is given to the economic
characteristics of property rights while recognizing the significance of sustaining
natural systems such as fish stocks. How people use ocean resources is inter alia a
product of the institutions governing economic activity. For example, the depletion of
off-shore oil deposits occurs within a set of rules that govern access and use rates. In
this context property rights can be considered as factors of production (Coase, 1960).
Rules also limit land-based activities that produce contaminants that enter harbours
and the marine ecosystem; and, govern non-commercial use and enjoyment of ocean
resources, such as boating, swimming and recreational fishing. A property right is a
socially recognized right to selected uses of an economic good or service. The usual
definition of property rights is quite broad and includes both formal and informal
rules that guide and govern the allocation of resources and distribution of welfare
within society.
The chapter is organized as follows. The first section uses the tools of
microeconomics to provide a framework for analysing property rights. The second
1
section discusses common property as a distinct arrangement of property rights. The
third section sets property rights within a broader context, providing a background for
institutional change and the evolution of property rights. A case study of New
Zealand’s fisheries management regime, which is based on tradable rights, is used to
demonstrate the operation of tradable property rights within sustainability constraints,
the dynamic unleashed by tradable rights, and efficiency gains that have followed
since their introduction in 1986.
PROPERTY RIGHTS AND EFFICIENCY
It has been long established that, under certain conditions, a competitive equilibrium
is Pareto optimal. Property rights are instrumental in mapping resource allocation
decisions into outcomes and wellbeing. Given competitive conditions and zero
transaction costs efficiency will achieved provided property rights are non-attenuated
(Cheung 1970; Furubotn and Pejovich, 1972). Randall (1975), an early contributor to
the property rights literature, defines non-attenuated rights as having the following
characteristics:
(a) The set of rights is completely specified. Complete specification reduces
ignorance and uncertainty.
(b) Rights are exclusive so that all costs and benefits are internalized and private
costs equal social costs.
(c) Rights are enforced.
(d) Rights are transferable so that rights like any other input may gravitate to their
most highly valued use.
In theory a competitive economy with non-attenuated property rights will be
Pareto optimal for some distribution of endowments. In this state it is not possible to
2
improve the wellbeing of one individual without reducing the wellbeing of another
individual. This result is, of course, the first theorem of welfare economics. Initial
endowments, as we shall see below, are important in the design of property rights
because there will be distributions of welfare that the competitive market cannot
achieve given initial endowments. The second theorem of welfare economics tells us
that any Pareto optimal allocation can be achieved as a competitive equilibrium if
appropriate lump-sum transfers are made (Mas-Colell, et al. 1995). Within the context
of property rights a practical application of this theorem would be in assigning space
for aquaculture, as an initial endowment, to a particular group within society in order
to create an opportunity for them to improve their wellbeing.
The assumption of zero transaction costs is a commonly used as an analytical
convenience. In most modern economies, significant resources are used to coordinate
the activities of individuals, firms and units of government. According to Arrow
(1969) coordination costs are simply the costs of running the economic system.
Transaction costs are, within the context of the above discussion, the costs associated
with contracting and are usually associated with gathering information, negotiation,
monitoring and enforcing agreements. Crocker (1971) usefully describes these as
informational, contractual and policing costs. Although transaction costs are positive
in the real world this does not necessarily indicate inefficiencies. If the transaction
industry, comprising for example rights brokers and buyers, is competitive then there
is no a priori reason why efficiency should be compromised. However, we will show
how relatively high transaction costs could work to favour the use of non-market
arrangements.
3
Economic rent
Economists use the term rent to describe payment for use of a resource regardless of
whether it is land, labour or equipment (Alchian, 1998). The concept of rent has
occupied a prominent place in economics. In the 19th century land was considered
fixed in supply and its use seen to generate rents. The concept of rent also applies to
the resources embodied in oceans. Users of space, such as marine farmers, combine
coastal space with inputs, such as labour and other intermediate factors of production
purchased at market prices. Profits arise from the difference between revenue and the
total cost of market priced inputs. Thus the demand for coastal space is based on the
contribution of coastal space to profit.
In the 20th century resource economists (e.g. Hotelling, 1931) – working with
models of stock (e.g. minerals) and renewable resources (e.g. fish) – recognised the
significance of use rates over time vis-à-vis optimal resource extraction and used the
term resource rent to describe the marginal value of the resource at a given point in
time. Setting aside complicating factors – such as stock size, uncertainty and
aggregation - resource rent is the difference between the market price of the
commodity and the marginal cost of extraction (Field, 2001). Resource-extracting
firms must be offered at least this amount to supply the market. Because time is
involved total resource rent associated with the use of a natural resource would be the
present value of rents over the period of use.
The concept of economic rent applies to ocean resources. It is reasonable to
assume that the supply function for products derived from the ocean (minerals, fish,
energy) derived from ocean resources is upward sloping (Clark, 1990). If use of the
ocean’s resources is profitable, then resource rents should be nonnegative (Arnason,
2002). Regardless of whether we are dealing with stock or renewable resources, the
4
system of property rights used to govern access and control will have a significant
impact on resource rent. Non-negative rents will attract new entrants and, unless
controlled, economic rent will be dissipated and the value that attaches to the resource
will be driven to zero.
Before leaving this section it is worthwhile clarifying the idea of quasi-rent
which is closely related to economic rent. The notion of quasi-rent was defined by
Marshall (1920) to denote a return to short-run fixed inputs. For example, uncertainty
over the impacts of aquaculture on the marine environment might lead government to
limit access to coastal space. If this becomes a binding constraint on aquaculture
development then, in the short-run, economic return to coastal space is determined by
fixity as opposed to the value of marginal productivity of coastal space. Imputing an
economic surplus to coastal space may not be consistent with the long run equilibrium
rental price of coastal space.
In summary, rent arises from the profitable use of market priced factors of
production in combination with scarce ocean resources. Rent is the marginal value of
the resource. At any point in time resource rent is contingent on market conditions
and expectations. A fall in demand for the commodity ceteris paribus would result in
resource rent trending down. In the absence of tradable rights that attach to the
resource identifying and measuring resource rent is not straightforward. On the other
hand if rights to the resource are well-defined then price – value of the right - will be
revealed in the market.
Economic value of rights
We used the term economic rent to describe the value associated with resource use.
Looked at another way, it represents what a profit seeking firm would pay for the
5
right to extract a resource. We also noted that, in theory, if the right is non-attenuated
the competitive market mechanism will result in Pareto optimality. When we step
away from the theoretical construct of non-attenuation and examine the positive
attributes of real-world property rights it becomes obvious that there is a multitude of
different systems of property rights in the economy. If existing rights to ocean
resources lead resource users to behave in an unsustainable way then a restructuring
of rights might result in efficiency gains. This section uses standard microeconomics
to describe important elements in a system of property rights as well as providing a
basis for empirically testable hypotheses.
We assume that firm A uses ocean space, input i, and derives profit according
to where p is output price and w is a vector of input prices. If the profit
function is well-behaved (Chambers, 1988) and differentiable, then the firm’s derived
demand for input i is given by
),( wpAπ
iw
wpAAi
x∂
∂−=
),(π and the derived demand function
for space is non-decreasing in the price (wi) of the input 0),(≤
∂
∂
iw
wpAi
x. To illustrate
the significance of transferability let’s assume that ocean space is not priced, is
allocated on a first-come-first-served basis, and that the right to occupy space is not
transferable. Firm A occupies a quantity of space and the value of the right to occupy
is . If ocean space is scarce and another firm, say B, has access to
more profitable technology, say v
00
>∫= dqq A
ixAv
B > vA then the economy is forgoing rent. On the
other hand, if the right is divisible and transferable then A and B can negotiate. Either
B can buy all of A’s entitlement to space or they can negotiate a price such that *i
w
6
**i
wBi
x
iw
Ai
x = . Transferability enables property rights to gravitate to their most
profitable use. The ability to transform a right ties in with the notion of transferability.
Transformability enables the right holder to create a derivative right. For example, a
fishing firm owning tradable harvesting rights to a species may choose not to exercise
the right in a given fishing season and lease the right out to another fisher.
Transformability creates flexibility.
Exclusion defines the right to exclude others from competing for the resource
and or free riding on investment. Non-exclusion is an attribute of pure public goods.
Initially we assume that the objective is to maximize the value of rent and that many
profit seeking firms harvest a resource from the ocean. Each firm is assumed to
maximize profit πi recovering q using a composite input e which costs w per unit and
sells output for p per unit. The economic outcome associated with two extreme
property right regimes (α) is shown in Figure 1. Under open access (α = 0) the right to
exclude others from entering and harvesting the resource does not exist. With open
access the prospect of positive profit vi > 0 encourages entry to the point where
individual profit is zero ; total rent is zero . This
equilibrium is described by average revenue being equal to average cost. If one firm
had sole rights to harvest the resource and it had the right to exclude (α = 1) then it
will balance marginal revenue against marginal cost and economic rent will be
positive . Thus the right to exclude prevents dissipation of value.
0=iv 0n
1i0=∑
==
=
ivV
α
01 >=αV
7
$/ firm
Figure 1: Open access and sole ownership
The above model can be generalized by making the d
continuous variable ]1,0[∈α where open access and perfect ex
and upper bounds respectively (Witt, 1987). Out of recogni
exclude requires monitoring and enforcement we specify transac
assume 0)(>
∂∂∂ αC . The objective function c
individual profit which is a function of the degree of exclusion.
policy, the design of property rights can be considered in term
benefits
)(1
)( αα ∑=
=n
iivV
)()()( ααα CVNB −= . Three outcomes can be readily id
No exclusion )()(:0 ααα VC >=
Some exclusion αα
ααα
∂∂
=∂
∂∈
)()(:)1,0( VC
Perfect exclusion αα
ααα
∂∂
<∂
∂=
)()(:1 VC
AR
MC = AC
MR
Vα=1 > 0 Vα=0 = 0
1 0 t
8
Aggregate effor
α = α =egree of exclusion a
clusion are the lower
tion that the right to
tion costs as )(αC and
omprises the sum of
Within the context of
s of maximizing net
entified.
Duration is the third important dimension of a property right. Assuming 1=α ,
if we let represent the claim that firm i has over profits in each year t then the
present value of the right to profit is . Two additional
parameters must now be considered. First, the discount rate r is an opportunity cost.
Other things being equal, higher discount rates lower the present value. Second,
duration works in the opposite direction, longer duration ceteris paribus increases of
present value of the right. The market value of a right perpetuity is greater than the
value of a right of more limited duration.
),( tiv α
dtT
t
rtet(αivr),t(αiv ∫=
−=0
),,
∫=
−>=∫∞
=
−=T
tdtrte)t(αiv
r
iv
tdtrte)t(αivrtiV
0,
0,),,(α .
Duration also has an impact on the choice of investment and therefore value of
the right. For example, if duration of the property right is limited say then
an investor will want to at least recover capital and a return within that period. Let’s
assume that project A yields a positive net present value over years.
Within the set of feasible projects, there could be an alternative B that begins to
produce positive net returns later which if discounted over a longer period T > t
∞<<1
0 t
0)1
( >tiA
V1t
1t 1
will yield a higher net present value . )()( TiA
VTiB
V >
Property rights that are secure against appropriation by others are relatively
more valuable. Developers of off-shore oil fields would look for secure title before
making asset-specific investments. The higher the probability of government
nationalising oil fields the lower the level of security. Similarly, investors in
9
aquaculture would require a right to space that could survive challenges from other
competing interests.
We now map the above dimensions of a property right into value (Arnason,
2000). The quantitative measure used to illustrate quality along each axis and ranges
from 0 to 1. For example, if the right is defined in perpetuity then it receives a score
of 1. If the right was not tradable then it would receive a score of 0. Figure 2
illustrates how the above dimensions of property rights map into value. Property
rights A scores higher in all dimensions than property rights B and we expect these
scores to be reflected in the value of the rights viz. . BVAV >
Duration
Property rights B
Figure 2: Mapping rights into value
Security
Property rights A
Exclusivity
Transferability
10
Initial entitlements
In the 1960s Ronald Coase writing on the problem of “social cost” suggested that
efficient outcomes could be achieved simply by establishing a set of non-attenuated
property rights. One popular version of the Coase theorem states that in the absence of
transaction costs it does not matter who gets the initial entitlement, efficiency will
obtain provided the rights are well-defined and, of course, tradable. Using earlier
notation let’s assume that firm A’s demand for ocean space is given by and
being first-in-time firm A is able to gain access to all space – say Z hectares -
available for aquaculture. Firm B, on the other hand can’t get access. Initial
entitlements in this instance are shown in Figure 3 as Z
Ax
A. Clearly this initial allocation
is not efficient, firm B could offer an amount sufficient enough to convince A to give
up some space. Provided the rights are tradable they would bargain out to Z*. If we
were to reverse the initial allocation such that firm B got the rights and A can’t get
access, the initial entitlement is now ZB. Similar logic applies, the firms will bargain
out to Z*. Thus the above version of the Coase theorem tells us that the outcome of
bargaining is efficient and invariant with respect to the initial entitlement.
Transaction costs can destroy this invariance. To illustrate let’s assume that
firm A gets the initial entitlement and that rights are tradable. However, if firm B
wants to buy rights it must hire a broker (c > 0) to negotiate a deal with A, thus B’s
input demand function is . Figure 3 shows B’s demand shifting down.
Exactly how transaction costs affect B’s demand function for space is an empirical
issue. Transaction costs could fall differently but the invariance of the outcome to
initial entitlements is unlikely to be preserved. Griffen (1991) has shown that
)0,( >czBx
11
transaction costs convey inertia to initial entitlements. The difference between pre-
trade and post-trade allocations decreases with increasing transaction costs.
$ xA(Z,c=0)
xB(Z,c=0)
Figure 3: Initial entitlements, bargaining and transaction costs
COMMON PROPERTY
The property rights described above could be referred to systems of private property
rights that underpin the market mechanism. The ability of exclude others from
deriving benefit from the flow of services associated with investment and the right to
transfer the right are essential to the operation of the market mechanism. As we will
see later on in this chapter, private ownership of a natural resource is not necessary.
For example, fish in the wild are typically res nullius, no body owns them. As
sovereign entities governments might claim the right to manage the stocks using a
Total supply = Z
W*
XB(Z,c>0)
ZB ZA Z*
12
system of transferable harvesting rights. In contrast, fish stocks farmed in the marine
environment could be privately owned. The term common property resource is often
used to describe situations where government owns the resource; no one owns the
resource (res nullius); and the resource is owned by a community of resource users
(res communs). Unfortunately the term open access has come to be used
interchangeably with common property when describing common pool resources,
typically fish stocks (Schlager and Ostrom, 1992). Common property resources are
resources in which there exist property rights and the property rights are exercised by
members of a group. There is rivalry in consumption within the group and
membership of the group is limited to legally recognized and enforceable rights
(Seabright, 1993). Clearly open access does not fit within the set of possible common
property arrangements.
If we limit discussion to a local commons, such as an area of coastal space set
aside for the supply of seafood to a community, then the main members of the
community are known to each other; some of their actions are observable; and they
have the ability, and sometimes the incentive, to build reputations (Seabright, 1993).
Property rights exercised by the community include: (1) management: the right to
invest in projects that enhance the flow of services from the resource and the right to
regulate use; (2) exclusion: the right to determine who will have access and how that
right might be transferred; (3) alienation: the right to sell interest in the rights
(Schlager and Ostrom, 1992). These characteristics of a local commons make
generalizations about objectives, structure and functions difficult. For example, a
local commons may decide that its management objective is to harvest fish for local
consumption that is of a size greater than that associated with a strictly rent
maximizing policy.
13
Continuing with the seafood example, conflicts of interest might well arise
over what size of fish should to harvest. Attitudes to risk and rates of time preference
are relevant here. Community members with higher rates of time preference and risk
neutral preferences might argue for increasing harvest – smaller fish - while those
with lower rates of time preference and risk averse preferences might prefer to harvest
larger fish. Given heterogeneity of preferences in the community, the central problem
is one of devising incentives, informal and formal, for cooperative behaviour that
advances community interests.
Player 2
Cooperate Defect
(4,4) (-10,5)
Cooperate
Player 1
Defect (5,-10) (0,0)
Figure 4: Prisoners’ Dilemma
Let’s deal with informal incentives first. Figure 4 shows the well-known
prisoners’ dilemma. The two players can’t communicate and only play the game once.
Both players will reason that defection is the best strategy. Thus aggregate utility is
zero. On the other hand if they agreed to cooperate then aggregate utility would be 16.
If the game is repeated, say at the beginning of the next fishing season, then the two
players may see the benefits of not defecting and decide to cooperate. Two conditions
are necessary for sustaining cooperation. First, the expected utility of future benefits
from cooperation must outweigh the immediate gains from defection. Second,
retaliation must be sufficiently credible so that if defection occurs other members of
14
the commons will invoke sanctions. Trust building activities, such as contributing to
community well-being and the sense of community reputation, can also underpin
cooperative behaviour.
Formal mechanisms for cooperative behaviour in the management of a
common property resource would involve combining elements of property rights as
described above. This does not necessarily imply privatization. For example, the
creation of private rights to harvest from a community owned fishery may fail to
account for externalities. In this particular instance, the community might set an
aggregate harvest limit for the season, lease annual share harvesting rights to
members and allow individuals to transfer these rights. The community could
undertake monitoring and enforcement activities. Clearly, defining harvesting rights is
only part of the common property arrangement. Participation in management
decisions and the distribution of benefits to the community might also feature in the
common property arrangement.
The above discussion suggests that common property arrangements are likely
to comprise rights explicitly granted (de jure) to resource users. For example,
legislation could be the source of the right of access, management, exclusion and
alienation. Rights (de facto) can also originate among resource users. The community
might, for example, define the set of allowing harvesting methods and the harvest
period to coincide with cultural norms. Thus a mixture of de jure and de facto rights
could underpin a common property arrangement. Different bundles of property rights
affect the incentives that individuals face, the actions they take, and the outcomes
achieved (Schlager and Ostrom, 1993). We should take heed of Demsetz’s (1969)
advice to avoid comparing the ideal institutions implicit in economic theory with
actual institutions. The performance of alternative common property arrangements is
15
a topic for empirical analysis where the comparative performance of different
arrangements, working in similar situations, can be assessed (Stevenson, 1991).
EVOLUTION OF PROPERTY RIGHTS
At any point in time we can observe a huge array of property arrangements, including
private property and common property. This array could be likened to an asset that
provides a flow of transaction services over time. Continuing with the stock-flow
analogy, transaction costs could be viewed as the cost of sustaining the flow of
services within society. Over time, the stock of property arrangements and indeed the
flow of services from any given stock, will change. For example, a particular mineral
extracted from the seabed might become relatively more valuable leading to a need to
better align property rights with public policy objectives. The design of new systems
of property rights is akin to an investment that offers the potential to enhance net
benefits to society or groups within society. Or, technical change result in lower
monitoring costs adding value to the existing property rights regime, and possibly,
enabling new rights to evolve. We discuss the role of institutions in general before
examining the evolution of property rights.
At the most fundamental level, institutions can be thought of as rules that
apply to the community that influence behaviour and provide sanctions for breaches
of the rules (North, 1990; Ostrom 1990). These rules can be the product of the
legislature, governments, the courts, and social convention. In a narrow sense,
institutions provide a set of rules that govern market exchange, the supply of services
from government and the distribution of goods and services in the economy (Davis
and North, 1971). Philosophers such as John Locke and Friedrich Hayek emphasised
that the structure of politically determined institutions had to rest on institutions such
16
as conventions about behaviour, custom and manners. In their view, government-
made rules are not necessarily the primary source of society’s institutional framework.
The notion of external institutions is useful when analysing reforms and the
evolution of property rights. External institutions, such as procedural rules that
instruct agents of government on approaches to resource allocation and income
distribution are the product of political action Kasper and Streit (1998). Because they
are prescriptive, external institutions place a high requirement on information and
knowledge. For example, in the context of the fisheries case study described below,
government officials are required to set an allowable harvest that moves the stock of
fish towards maximum sustainable yield. This external rule is part of a broader
framework within which rights to fish can be traded. In other words, decisions as to
who will fish, and when, is decided in a decentralised market; the aggregate quantity
of harvest is decided by external rules administered by government officials.
Typically, legal sanctions exist for violating the rules.
We use a slightly modified version of a model developed by Anderson and
Hill (1975) to illustrate the evolution of property rights. Establishing and protecting
property rights is an economic activity which is summarized by the variable x. The net
benefits associated with x are given by ))(())(())(( xCxvxNB ααα −= . On the benefit
side the activity x results in a degree of exclusion, which we defined earlier as α. The
cost of producing property rights increase because of the opportunity cost of resources
used in property rights activity. Optimal property right producing activity is given by
0))((=
∂∂
xxNB α
The equilibrium level of property right producing activity is illustrated in Figure 5.
Comparative static analysis follows in a straightforward way. For example, the
17
marginal benefit function would shift outwards if the asset’s value increased because
of increased relative scarcity. A fall in the price of property right producing inputs
would work to lower the marginal cost function. For example, advances in
surveillance monitoring systems would contribute to lowering the marginal cost of
enforcement.
$
MB
MC
x = rights producing activity
Figure 5: Production of private property rights
If we step outside the assumptions of microeconomic models into the so-called
real world it is not possible to specify an optimal institutional design within the
context of sustainable development. However we can check whether the attributes of
institutional structure and decision-making are consistent with the general notions of
sustainable development. Property rights are a primary institution for facilitating
economic growth and we should look for the following desirable characteristics:
• Sustainability should be explicitly incorporated into mechanism design.
• The mechanism should unleash a dynamic that enables parties to exploit
commercial opportunities for mutual gain.
• Users should be confronted with the real (and dynamic) opportunity cost of use.
18
• The allocation mechanism should have the flexibility to adapt to changes in the
profile of opportunity costs over time.
• The mechanism should make anticipation and strategic planning feasible for
users.
What tends to be neglected in most arguments for and against market-based reforms is
the fact that all instruments generate effects. The inescapable conclusion is that
economic instruments provide a least-cost option for achieving an environmental
target because they provide flexibility in the firm’s response, whether through
investment, changing input mixes, changing production, and so on. Furthermore,
transparency tends to be greater with market-based instruments relative to the less-
visible costs associated with regulations.
NEW ZEALAND’S QUOTA MANAGEMENT SYSTEM
The aim of this section is provide a real-world illustration of how tradable property
rights, working within the constraints of sustainability, have turned around a fishing
industry that was barely profitable and while providing a platform for fish stocks to
re-build. Prior to the 1980s government used financial incentives coupled with
relatively open access to encourage development of New Zealand’s fisheries. Under
these conditions the simple model illustrated in Figure 1 would predict fisheries
characterised by a high level of effort and low economic rent. Data show that by the
early 1980s many important fisheries exhibited the biological and economic effects of
over-fishing. In short, too many boats were chasing diminished stocks. Fisheries
managers were faced with the twin problem of removing harvesting in excess of
sustainable yield, and reducing effort. Effort reduction was achieved in two stages.
First, part-timers and those not exercising their right to fish had their permit revoked.
19
Second, the government operated a buy-back mechanism involving sealed tenders
where fishers stated their willingness to accept compensation to permanently
withdraw their historical harvest entitlement (Sharp, 1997).
Legislation in 1986 introduced the quota management system (QMS) into a
number of New Zealand’s commercial fisheries. The QMS has two structural pillars:
first, an annual total allowable catch (TAC); second, individual transferable quota
(ITQ) rights. The initial allocation of quota, to those choosing the remain in the
industry, was based on the average of harvests taken in any two out of three fishing
years 1982-84. Fish stocks outside the QMS are managed by a system of non-
transferable permits and administrative allocations.
Total allowable catch
Legislation imposes a duty on the Minister of Fisheries to set a TAC that moves a
stock towards its MSY. In deep water fisheries, such as orange roughy, there is no
recreational interest to recognise and the total allowable commercial catch (TACC) is
set equal to the TAC. However, in shared fisheries, such as rock lobster, the Minister
is required to make allowances for non-commercial harvest. If we summarise the
latter allowances as a total allowable non-commercial catch (TANC) then the
following equality holds: TAC = TACC + TANC. Commercial fishers exercise their
ITQ rights when harvesting their share of the TACC; non-commercial harvesters are
regulated by daily catch limits.
Three key clauses that limit the power of the Minister when determining or
varying the TACC:
20
1. After having regard to the TAC, the Minister must allow for Maori, traditional,
recreational, and other non-commercial interests in the fishery; and any allowable
catch for foreign vessels.
2. When considering any reduction in the TACC, the Minister must have regard to
whether other controls available would be sufficient to maintain the stock at a level
where the current TACC could be sustained; and whether or not a reduction in the
level of fishing could be achieved by the government retaining or obtaining quota and
not making those rights available for commercial fishing.
3. Before setting the TACC, the Minister is required to consult with the Fishing
Industry Board and others with an interest in the fishery.
A net-benefit maximising allocation of the TAC, as illustrated in Figure 6,
requires a balancing of net marginal benefits between commercial and non-
commercial allocations. Let’s set the TAC = Q* and describe the present value of net
marginal benefit to two groups - commercial and non-commercial fishers - as NBC
and NBNC respectively. The marginal cost of supplying a harvesting right to either
group is assumed to be the same. Figure 6 shows that the TAC should be allocated in
such a way that the present value of net marginal benefits are equalised. If the right to
harvest is not differentiated and tradable, then competition will result in a uniform
price P*. Commercial fishers will harvest and the non-commercial . Provided
the TAC is set at the optimal level Q* use of the right is immaterial to achieving
efficiency.
*QC*Q NC
21
NBC NBNC
F
r
M
n
i
w
a
s
o
f
u
P*
0
TAC =
igure 6: Optimal allocation of the total a
Efficiency is beyond the reach
easons. First, The TAC is set according
inister of Fisheries to move stocks tow
ot their maximum economic yield.
nstitutional structure where the non-com
ith stakeholders. No explicit price a
symmetry makes it impossible to conclu
atisfies a net-benefit maximising criterio
f Appeal during a case involving a pro
ishery TACC. The Court found in favo
ndertake “a careful cost-benefit analysis
QNC*
0 QC*Q*
llowable catch
of New Zealand’s QMS for
to a legislative mandate tha
ard their maximum sustainabl
Second, the QMS sits with
mercial allowance is set afte
ttaches to non-commercial
de that the outcome of TAC s
n. This shortcoming was note
posed decrease in the north e
ur of industry and advised t
of a range of reasonable optio
22
at least two
t requires the
e yield (MSY)
in a broader
r consultation
harvest. This
etting process
d by the Court
astern snapper
he Minister to
ns available.”
When the QMS was introduced, future changes in the TAC were to be effected
through buying and selling activities of government. By 1989 the cost of effecting
reductions to the TACC was considered unmanageable and 1990 legislation redefined
quota rights as a percentage of the TACC. Any changes to the TACC are now pro-
rated across ITQ owners. For TACC increases, existing ITQ owners enjoy the
benefits of extra harvest at no cost. For TACC decreases, an “Accord” was negotiated
between government and industry to provide compensation payments over a transition
period to 1994. During this period resource rentals, were set aside to compensate
quota owners for TACC reduction. The change to proportional ITQ shifts the
distribution of stock assessment risk from government to industry. The Minister sets
the TACC and the net benefits of this decision fall on industry. Re-establishing
incentive compatibility into the TACC adjustment mechanism hinges to a large
degree on the involvement of industry in future catches through stock assessment
research (Pearse, 1991). Other things being equal, the right should be less valuable
under proportional ITQ.
Geographic boundaries
Fisheries management areas (FMAs) define the geographic boundaries for
management and quota markets. Legislation empowers the Minister to specify
separate TACCs for defined area within a quota management area. The New Zealand
exclusive economic zone is divided into 10 FMAs. Separate fish stocks have been
identified based on the distribution of biological stocks for each species. Each fish
stock is been defined by its own quota management area (QMA). For example, rights
to harvest in the north eastern snapper fishery are labelled with the suffice SNA1.
23
Quota management areas may be the same area as a FMA or in some situations a
QMA may span several FMAs.
Individual transferable quota rights
Quota rights are an essential input into commercial fishing. Let’s assume that we are
considering rights to a single species in a given FMA. We can summarise the demand
for rights as q
i wwppwD
∂∂
=),(),( π . Diminishing returns to quota ownership is assumed
0<∂∂
q
i
wD
and market demand for quota is given by∑ iD . This definition lends itself
to standard microeconomic analysis. Commercial fishers willingness to pay (wq) for
the right will depend on the quality of the right, stock abundance, the price of other
rights, the market price of fish, harvesting technology and so on. Figure 7 provides a
static framework for comparative static analysis.
As is the case with private goods in the economy, aggregate demand for ITQ
is arrived at by horizontally adding the demand of individual firms at a given market
price. Returning to Figure 7, the TACC constrains harvest; firm 2 is willing to pay
more per unit of harvest that firm 1; thus firm 2 will harvest a greater share of the
TACC. This decentralised outcome may change. For example, firm 1 might invest in
a more efficient vessel, effectively shifting its demand curve out beyond firm 2. Given
the binding nature of the TACC, firm 1 would have to pay firm 2 for the additional
rights required. Trading ensures that rights to gravitate to their most highly valued
commercial use. The economic impact of adjusting the TACC is also evident in
Figure 7. Increasing (reducing) the TACC ceteris paribus will result in the market
price of ITQ falling (increasing). Batstone and Sharp (2003) provide empirical
24
evidence of a functional relationship between the quota price for snapper, and a set of
explanatory variables, including the TACC, interest rates and export prices.
$
Figure 7: Simple model of New Zealand’s quota management system
Initially quota rights were defined as a right to a tonnage in p
original adjustment mechanism had government entering the market
rights if stock assessments warranted increasing the commercial harves
the commercial harvest exceeded that considered sustainable. A revie
legislation concluded that this mechanism created incentives to fully har
because government would provide compensation - through its buying a
quota market - for any reduction. In 1990 legislation redefined quo
percentage of the TACC. The change to proportional ITQ shifted the
stock adjustment risk from government to industry.
Annual catch entitlements (ACE) were introduced in 2001 (Peacey
rights continue to be expressed as shares of the TACC whereas ACE ar
wq
D1
∑Di
D2
C
25
Harvest
TACerpetuity. The
as a seller of
t, as a buyer if
w of fisheries
vest the TACC
ctivities in the
ta rights as a
distribution of
, 2004). Quota
e expressed in
kilo
ed in 1986 and, at that time,
its intention to introduce more species in the near term. Each
grams, based upon the shares held and the TACC set at the start of that year. ACE
are generated each year from ITQ and can be traded separate from ITQ. However,
ITQ cannot be used to balance catch, only the ACE it generates. Fishers without
sufficient ACE to cover catch by the 15th of the month following catch get a deemed
value invoice which must be paid within 20 days. If after 20 days the amount owing
for deemed value is in excess of $1,000 then their permit is suspended, and any
further fishing will be a criminal offence. There are two rates of deemed values,
interim, and annual. The interim rate is designed to act as a bond to encourage fishers
to get ACE into their account. The annual rate is designed to be a major disincentive
to have any stocks out of balance at the end of the year.
Coverage of species
Transferable rights to harvest 27 species were introduc
government signalled
species received a three letter species code and a suffix code that identified the area.
The extent to the right to harvest is broken down into areas is variable and reflects
inter alia the number of stocks, their biological characteristics and knowledge of the
species. In 1996, 32 species or groups of species are controlled by the QMS. At this
point in time, over 130 species were not covered under the QMS. In his review of
fisheries management Pearse (1991) noted that there was an incentive to harvest non-
ITQ stocks because catch history was used to establish initial allocations when these
species are incorporated into the QMS. In 1992 government closed entry to non-ITQ
fisheries in an attempt to limit fishing pressure. In 2001 45 species are controlled by
the QMS.
26
Rights of Maori
raditional fishing interests of Maori were guaranteed under the Treaty of Waitangi
en acknowledged in fisheries legislation since 1877. In 1983 the
ed the full and final settlement of Maori claims to
sea fish
Monitoring and compliance
The ability to accurately monitor catch levels and balance these against quota
holdings is critical to the success of the QMS. The Ministry has established
procedures to monitor and enforce the QMS based on a system that tracks the flow of
T
1840 and have be
Fisheries Act stated that “nothing in this Act shall affect any Maori fishing right”.
When the QMS was introduced the strength of this provision was tested in the High
Court which found that the Fisheries Act did not affect the exercise of customary
rights. Although Maori agreed with the conservation functions of the QMS they saw
the allocation of quota as inconsistent with the Treaty and the section in the Fisheries
Act protecting their rights. The High Court found that the QMS had been developed
without taking into account Maori rights in fisheries and that it was possible that the
system may breach these rights.
After extensive negotiations between the Crown and Maori, the Crown offered
a package on the basis that it form
eries. The settlement involved: 10% of all existing ITQs; 20% of the TACC
for any additional fish stock brought into the QMS; and funding to assist Maori into
commercial fishing. The Deed did not, however, extinguish the right of Maori to have
customary non-commercial claims considered. Taiapure provisions of the Fisheries
Act 1983, and the maitaitai reserves of the Treaty of Waitangi (Fisheries Claims)
Settlement Act 1992, together seek to provide Maori with a management role in
customary fishing and to recognise Maori food gathering interests.
27
fish and fish products from the catcher to the purchaser and then to reconcile these
catches with quota holdings. Fishing permit holders are required to provide detailed
catch reports, along with additional information on effort. Permit holders are required
to complete a report at the end of each fishing trip to record catch details (including
vessel, location, species and quantities), which quota the catches are to be counted
against and to whom the fish is sold. Commercial fishers are restricted to selling fish
to licensed wholesalers and processors. Licensed receivers are also required to
provide monthly reports. These sources of information enable the Ministry to monitor
catches against quota holdings and audit records.
By-catch
The integrity of an ITQ system of management relies on commercial fishers
exercising their harvesting rights only for those fish covered by their entitlement.
who wilfully targets species, without harvesting rights, is committing an
d by their quota
entitlements. From 1986 until 2001, the primary unit of the catch-balancing regime
Any fisher
offence. Wilful intent may be difficult to prove. Dumping species is also illegal. In a
multi-species fishery it is likely that individual harvest will not conform exactly with
quota holding. Depending on the technology used, and species targeted, other species
will be caught. The structure of property rights therefore needs to make allowance for
the likelihood of accidental over-fishing, especially by-catch that are not the primary
target species. The problem of by-catch has characteristics of a moral hazard (Jensen
and Vestergaard, 2002) in that fishers make unobservable decisions that have spill-
over effects. Addressing this problem is an issue of incentive design.
The possession of quota does not entitle fishers to target species without regard to
other species they might take as by-catch. Despite advances in technology, fishers
exercising their legal rights can accidentally catch species not covere
28
wa
e the
AC
ernment's fisheries policy. A resource rental was payable,
f whether fish were harvested, to government on a per tonne basis.
s ITQ. The catch-balancing regime is the term used to describe the system by
which a fisher's catch is reconciled with the catching rights that he or she holds. Four
options were available to those who accidentally exceed their quota entitlement: 1)
surrender fish; 2) acquire quota; 3) by-catch trade-off and 4) pay deemed value.
A new catch-balancing regime was implemented in October 2001, ITQ remains
the in-perpetuity right to receive a share of the TACC each year. At the start of each
fishing year, the ITQ generates Annual Catch Entitlement (ACE) based on the share
of the TACC. This ACE is allocated to the owner of the ITQ who can either us
E to cover catch of the relevant fish stock or sell it to other fishers. ACE is now
the only currency for covering catch. In most fisheries the only requirement before
fishing is that a fisher holds a fishing permit. Permit holders are required to obtain
ACE to cover their catch or pay the appropriate Deemed Value. Most fishers obtain
ACE before they go fishing; some obtain it after they have taken the catch. Both
approaches are acceptable.
Resource Rentals
When government implemented the quota management system it stated that resource
rentals were going to be levied. Until 1994 resource rentals were one of the most
contentious elements of gov
on ITQ regardless o
The rental varied across species and was not paid on quota held by government. The
Minister had the right to can vary resource rentals each year. The maximum increase
was 20% in any one year. In setting the rental the Minister was required to have regard
to the value of the ITQ, the impact on net commercial returns, and relevant changes to
TACC. From the outset government made it clear that it intended to increase resource
rentals until the value of annual traded quota approached zero. Resource rentals were to
29
be paid into the Fisheries Fund which was to be used to finance management and
research activities. The fund was never established and rentals were paid into
government's consolidated fund.
Industry vigorously opposed resource rentals. Stock ownership is unclear.
Even if tradable rights create an economic surplus in the fishery, the problem of
determining government’s share of the surplus is not straight forward. Property
legislation produces rents elsewhere in the economy and it is not clear why rents in the
fishery
Achieving
ed at least two policy instruments viz. tradable
ing commercial harvest to a
should be singled out for taxation. Each year significant resources were
allocated -- by industry and government -- to present convincing arguments for and
against changes to resource rentals. Resource rentals contributed to the overall level of
commercial uncertainty in the fishery. In 1994 resource rentals were removed as part of
government's policy to recover management costs from commercial fishers.
Sustainable Development Outcomes
Within the context of fisheries management mechanism design can be assessed
according to the changes in economic rent and biomass over time. The outcomes
associated with fisheries management prior to 1986 were not sustainable.
the twin goals of sustainability requir
rights working within the constraints of a sustainable harvest. We use the rock lobster
fishery to illustrate the gains associated with the QMS.
Prior to the early 1980s commercial rock lobster fishing in New Zealand was
characterised by low profitability and unsustainable harvest levels. A moratorium
limiting further entry into the fishery was implemented in the early 1980s. Rock
lobster was introduced into the QMS in 1990 constrain
TACC directed towards MSY and, importantly, enabling fishers to trade in the market
for quota. In general, biological models show the vulnerable biomass of rock lobster
30
increasing since 1990. Sustained increases in CPUE support independent evidence
that the overall biological state of the fishery has improved quite markedly over the
period. Summary statistics for the rock lobster fishery show average landings, and
landings per labour unit increasing over time. Overall, the rate of technical progress,
measured in terms of cost reduction over the period 1990-2000, has shown steady
improvement (Sharp and Jeffs, 2004). In terms of profitability, positive quota prices
indicate positive rents. Econometric estimates of the rate of profit return as a function
of the opportunity cost of capital and changes in the vulnerable biomass provide
evidence of an optimal fishery (Zang, et al., 2006).
Property rights underpinning the QMS are distributed between commercial
fishers, non-commercial stakeholders and the Minister of Fisheries. Tradable
harvesting rights are operated in a decentralised fashion and evidence points to the
rate of return approximating what fishers could achieve elsewhere in the economy. It
Pearce et al. (1989) define sustainable development in terms of devising a social and
economic system which ensures that a set of desirable goals or objectives for society
are sustained. Institutional reform is one of the most powerful instruments that
se to achieve sustainable development of oceans. This chapter has
provided a microeconomic framework that can be used to analyse the detail and
would also appear that the QMS captures the broad range of values associated with
the harvesting and conservation of fisheries. A non-market mechanism, administered
by the Ministry of Fisheries, is used to capture these broader values. Economic
efficiency of the QMS hinges on the balancing of commercial and non-commercial
interests. It is highly unlikely that the QMS would deliver outcomes that could be
described as a bio-economically efficient.
CONCLUSIONS
governments can u
31
structure of alternative systems of property rights. Policy will be better served by a
better alignment of property rights, incentives and outcomes. The real-world example
of New Zealand’s fisheries management system is a world-leading example where
rights based fishing can deliver both profitable and sustainable use of ocean resources.
32
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