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UW-Madison AFROAMER 343 - lecture 23 aae 343 spring 2013

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Topics Today (4/16/13)  Managing renewable resources (finish up)  Announcements  Hwk #8 due today at the start of class  EXAM THURSDAY  No Homework, No discussion this week  Office hours: Wed 2:30-4:30 1Individual Transferable Quotas (ITQs) Here’s how it works: 1. Government sets the TAC at harvest level h*, allocates the TAC across boats as ITQs 2. The “Invisible Hand” assures the price of a quota is equal to the difference between the price of fish P and MECAGG at h*. This is the MNBAGG (that is, MNBAGG=P- MECAGG) 3. Each boat fishes to the point where its MNB is equal to the price of a quota 4. This means that each boats MNB is the same as that for every other boat 5. Since each boat’s MNB is defined as the difference between the price of fish and the boat’s marginal extraction cost, MNB=P-MEC, and the price of fish is the same for every boat, it follows that MEC is the same for every boat. 6. This condition –MEC is the same for every boat—is the condition for catching h* at least cost 2P harvest D=MB $ h*=TAC MECAGG MEC3 MEC2 MEC1 A O h1 h2 h3 Managing a fishery: Individual Transferable Quotas (ITQs)  Example of an ITQ system: non-constant, heterogeneous marginal extraction costs 3 Firms equate their MNB to the price of an ITQ, and thus they set their MEC to one another –the condition that must hold for cost effectivenessInitial allocation is low Why make quotas transferable? MEC3 MEC2 Initial allocation is high $ P A B C D E F Individual Transferable Quotas (ITQs) Permit Price = P-MECAgg (h*) =MNBAgg(h*) 4 Firms equate their MNB’s to the price of an ITQ, and thus they set their MEC’s to one another –the condition that must hold for cost effectivenessIndividual Transferable Quotas (ITQs) The TAC in an ITQ program, h*, is not necessarily the efficient catch, just as the cap in a cap-and-trade pollution program is not necessarily efficient (does not necessarily equate MPD to aggregate MAC). h* is simply a “desired” TAC chosen by government. 5Individual Transferable Quotas (ITQs) Summary comparison with tradable pollution permits TPPs ITQs Government must set… Total allowable emissions Total allowable catch (TAC) Generates least cost … Reduction in emissions Harvest of the TAC Cost effective? Yes Yes Price of a permit/ITQ equals… MACAGG MNBAGG Firms set what equal to the permit/ITQ price? MAC of emissions MNB of fish catch Condition for cost effectivness? MAC is the same for all firms MEC is the same for all firms Permits/ITQs can be banked? Usually Sometimes; at most a small amount to avoid high-grading 6 Advantages of ITQs compared to Regulated Open Access  Capture rents to the resource (reduced capitalization)  US. Surf clam fishery (ITQs established 1990)  Initially 67 boats in the fishery; dropped 54% within 2 years  Fishing time per vessel: 154 hours per year to 380 hours per year  Average catch per vessel: increased 96% in the first two years  U.S. Alaska Halibut fishery  Initially 3,450 vessels in 1994 reduced to 1,300 vessels in 2005  Safety  No need to fish in rough seas, 24 hours a day (“We don’t drown a bunch of fishermen every year” –Clem Tillion, former Chair of North Pacific Fisheries Management Council  Increase in ex-vessel product price  Ex/ 1992 Canada Halibut price was 3x higher than U.S. price; 90% of Canadian catch went into fresh market  Lower harvesting costs (note: part of reduced capitalization)  More flexible fishing schedules  Reduce gear loss  Lower ghost catch  Ex/ Canadian Halibut TAC previously included a deduction of 300,000 lbs. for ghost catch; now ghost catch deduction is close to zero Individual Transferable Quotas (ITQs) 7 Issues/Disadvantages  Increased Discards (Highgrading)  Possible mitigation:  Value-based ITQs  Monitoring  Carry-over/Carry-under  Negative implications for coastal communities  Concentration of quota  Ex/ NZ’s three largest consortiums owned 43% of quota in 1987, owned 50% in 1992  Ex/ NZ abalone quota has split up over time  Quota simply move out of local communities  Can allocate some quota to communities Individual Transferable Quotas (ITQs) 8Case study: Pacific Halibut Fishery 9Case study: Pacific Halibut Fishery 0.005,000.0010,000.0015,000.0020,000.0025,000.0030,000.0035,000.0040,000.0045,000.001950195219541956195819601962196419661968197019721974197619781980198219841986198819901992199419961998200020022004200620082010U.S. Pacific Halibut Metric Tons Typical of fisheries in U.S. water: stock is not in a state of being overfished (though not true for all stocks) ITQs begin 10Case study: Pacific Halibut Fishery Days fishing 11Case study: Pacific Halibut Fishery Average price per pound 12Arne Fuglvog  Commercial fisherman, Petersburg, Alaska  “Under the present ITQ system, we have an 8-month season. We can choose when we go out and fish. We can go when the prices are high. We can work it around our crew schedule, our family schedule. We fish totally different now.”  “I do think it's true that ITQs have fostered better stewardship. And one of the main reasons is that we do own part of the resource. We want to keep the resource healthy. We don't want to overfish it. We want to keep making a living at it for as long as we can and keep it for future generations”. Individual Transferable Quotas (ITQs) Quotes from PBS series, “Empty Oceans, Empty Nets, http://www.pbs.org/emptyoceans/eoen/halibut/viewpoints.html 13Newell, Sanchirico, and Kerr, “Fishing Quota Markets”, 2005 Abstract: In 1986, New Zealand responded to the open-access problem by establishing the world's largest individual transferable quota (ITQ) system. Using a 15-year panel dataset from New Zealand that covers 33 species and more than 150 markets for fishing quotas, we assess trends in market activity, price dispersion, and the fundamentals determining quota prices… …[T]hese markets are operating reasonably well, implying that ITQs can be effective instruments for efficient fisheries management. Individual Transferable Quotas (ITQs) 14U.S. Policy with respect to ITQs  For many years a moratorium on ITQs  Imposed in 1996…  Distributional concerns  Resistence to ITQs from fishermen making near-zero profits  Moving from XOA to XESY involves downsizing of the fleet, short-term hardship  This is changing… Source of image: NOAA at


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