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"REYKJAVIK, Iceland--The Icelanders discovered America but had the good sense to lose it, Oscar Wilde once observed. He was referring to the fact that about 1,000 years ago, Icelandic seafarers explored the coasts of Labrador and Newfoundland and even settled a few places. But being few and poor, and encountering hostile natives, the Icelanders up and left shortly thereafter.
Around the same time, the Icelanders made another interesting discovery that had gone unnoticed by Wilde and most others--they found out that a free-market society fulfilled their needs and ensured their freedoms. Eight centuries before Adam Smith, the islanders on these shores developed the so-called Icelandic Commonwealth, where law was privately enforced, and individual farmers had a choice of allegiance between several chieftainships that served, in effect, as private protection agencies. Some libertarian economists have hailed this ancient experiment as an example of how the free market can provide legal protection.
This tradition of relying on the free market informs the actions of the Reykjavik government today--especially in the area of fishing, where transferable quotas have rationalized the industry. Unfortunately, the successful system is under threat from critics who want the government to confiscate and lease the quotas for revenue.
Since 1984, a system of individual, transferable share quotas in Icelandic fisheries has resulted in the industry becoming quite profitable. For example, from 1984 to 1997, the total value of the catch went up by than 35%. Yet even as the industry expands, the fish stocks in Icelandic waters have been slowly regaining their former strength--most importantly the cod stock, which was seriously endangered in the early 1980s.
The success of the Icelandic system stands in sharp contrast to the general failure of fisheries elsewhere. Fish stocks in the formerly fertile Grand Banks off Newfoundland and in Georges' Bank off New England have collapsed. European fishermen now only harvest a fraction of what they used to in fishing grounds in the North Sea and the Baltic. In other fisheries the picture is even bleaker. As they fight for survival, the companies in the business overfish, endangering stocks. In fact, the United Nations has proclaimed 1998 the "Year of the Ocean." Most fishing firms operate at huge losses, and fisheries in many countries have become a huge burden on taxpayers.
In Iceland, however, a combination of three factors made the Icelandic quota system possible. First, Iceland won the "Cod Wars" against the British. London opposed the extension of exclusive economic zones to 200 miles by sending in the Royal Navy to protect the British fishing fleet in 1958, 1972 and 1975, but eventually gave up. In 1975 the Icelanders were able to extend their exclusive economic zone and to set rules about the utilization of the ample fishing stocks within it. Decreasing catches had made the fishing vessel owners fully aware of the danger of overfishing, spurring them to work with government to find a solution.
The system works likes this: The government, on the advice of marine biologists and owners of fishing vessels, sets a total allowable catch each year in each fish stock of any commercial value. It then monitors the fishing vessels. On the basis of their catch history, the vessel owners are each allocated individual quotas. For example, if a fishing firm holds a 1% quota in the cod stock, and the total allowable catch for the fishing year is 250,000 metric tons, then this fishing firm may harvest 2,500 metric tons over the fishing year in whatever way it deems efficient. As the individual quotas are permanent, the fishing firms can embark upon long-term planning of the size and scope of their operations. And because the quotas are transferable, the more efficient firms will buy quotas from the less efficient ones, reducing the size and cost of the fishing fleet.
The introduction of individual, transferable quotas in the Icelandic fisheries is a big step toward establishing private property rights in fish stocks. It is well known that in the absence of property rights, natural resources will be over-exploited. Where there are no fences, there will be overgrazing. Similarly, with present technology, open access to fishing grounds will inevitably lead to overfishing: too many fishing vessels chasing an ever-dwindling stock of fish.
With the allocation of quotas in an annual allowable catch, however, Iceland's fishing grounds have been closed to all but the holders of these quotas. Quota-holders have gained an exclusive right to harvest the fish in Iceland's waters, just as the owners of parcels of land have an exclusive right to cultivate them. By gaining this right, the Icelandic vessel owners have become custodians of the fish stocks. Therefore, it's in their interest to maximize the long-term revenues from the fisheries. Indeed, in the last few years the owners of fishing vessels have been pleading for responsibility in setting the annual total allowable catch in the various stocks. They now have something to gain, or lose, from the long-term state of the stocks.
Nevertheless, the Icelandic quota system has its critics, who bitterly complain about how the quotas were initially allocated. Why didn't the Icelandic government auction off the quotas instead of handing them out, free of charge, to those vessel owners who happened to be harvesting fish in the years preceding 1984? Those critics do not, however, seem to realize that the initial allocation of the quotas was, by necessity, acceptable to the vessel owners. After all, the sea, which had been open for thousands of years, was now being closed off to all but the holders of quotas. Furthermore, the vessel owners were the only ones with a strong vested interest in maintaining access to the fishing grounds.
By allocating the quotas, however, the Icelandic government ensured that no one in the fishing community had anything to lose. The less efficient sold their quotas and left fishing altogether, while the more efficient bought quotas and used them to rationalize their operations. In recent years, as the quota system has proven to work quite well, and with fishing firms becoming ever more profitable, the critics have become increasingly vocal. They demand that Iceland's government appropriate the quotas now held by fishing firms, and then lease them to those firms for a limited period of time.
Taking this step would greatly reduce the incentive that the owners and managers of fishing firms have in preserving and, even more importantly, developing the fish stocks. But because many people resent the huge profits now being made in the fisheries, the critics have found a receptive audience in Iceland. It would be a tragedy if the Icelanders, in a sudden fit of resentment, throw away the quota system and thereby lose the third great discovery in their history."
-Hannes H. Gissurarson, "The Viking (And Free-Market) Solution to Overfishing", The Wall Street Journal-Europe, 2 novembre 1998: https://www.wsj.com/articles/SB910036683301134500
"Overfishing is often presented as a classic example of market failure. When individual fishing enterprises are competing, the benefits of winning the ‘race to fish’ accrue to the successful ones, while the costs of depletion are shared among all the fishermen in the fishery. There are therefore poor incentives for conservation – the so-called ‘tragedy of the commons’.
This is a simplistic interpretation, however. Market feedback mechanisms offer some protection to stocks. Declining yields will tend to force less efficient fishermen out of business, for example. Providing there is free trade in fish and substitutes are available in food markets, the combination of increasing costs and declining catches may not be offset by higher fish prices. The outcome will partly depend on the species in question. Its scarcity value, reproductive behaviour and migration patterns may affect the probability that overfishing leads to a collapse in stocks.
The history of the fishing industry shows overfishing has been hugely exacerbated by government intervention, in particular subsidies for uneconomic fishing businesses. These handouts have undermined the market mechanisms that would have helped to conserve stocks. The resulting overcapacity – too many vessels chasing too few fish – has strengthened the rationale for costly and bureaucratic regulation of the sector, as exemplified by the EU’s Common Fisheries Policy. As public choice theory would predict, such regulation has inevitably been subject to politicisation and lobbying by special interests, which has meant problems with overfishing have persisted. The creation of artificial property rights by governments, such as the Individual Transferable Quotas used in Iceland, has tended to deliver superior allocative efficiency compared with other forms of regulation, but has not been immune to special-interest influence or indeed discarding.
These problems raise the question of whether an unhampered market could solve the problem of overfishing. Clearly the removal of direct and indirect government subsidies would go a long way towards resolving the issue. However, it would not remove the tendency entirely and both yields and efficiency could still be suboptimal. While collapses would be less likely, they would not be impossible – and there are indeed examples that pre-date direct state subsidies to the industry.
There would therefore appear to be a trade-off between competition and efficiency. This is the case in many sectors, for example due to the ‘transaction costs’ resulting from competition, or because competition means economies of scale are lost (the rail industry is a classic example). Indeed it is a common misperception that unhampered markets inevitably produce a high level of competition. It depends on the characteristics of the sector concerned. One way markets can reduce transaction costs and capture economies of scale is through mergers and acquisitions.
In the fishing industry there are potentially major efficiency losses from competition in the form of the ‘race for fish’, both in terms of wasteful duplication of equipment, fishing effort and the depletion of stocks to suboptimal levels. There may therefore be strong incentives for fishing enterprises to merge or evolve into one large business (which could perhaps be some kind of cooperative) that held a near monopoly over fishing in a particular region. This dominant enterprise would then determine catch levels to maximise returns.
If fisheries remained ‘open access’, how could this structure be sustained? The market solution may be vertical integration. The dominant firm would merge with the harbours and/or the distribution operations in the region and perhaps even the fish processing industry, enabling it to exclude local competitors and to capture economies of scale that would act as a further market-based barrier to entry. Competitors from further afield would face much higher costs to reach the fishery. Nevertheless, initially the dominant firm might choose to deter them by deploying some of its vessels in a ‘race to fish’ in order to drive them elsewhere. Clearly there would be strong incentives to develop agreements between neighbouring firms not to stray into each other’s area of operation, to avoid the costs of such behaviour, and possibly also rules regarding migrating fish.
Subsidies from foreign governments to their own industries could upset this market outcome by artificially sustaining the ‘race for fish’, which raises issues regarding state protection of territorial boundaries within the current system of Exclusive Economic Areas. However, in principle there is no reason why these dominant firms or associations should not straddle existing national boundaries, with their geographical extent evolving according to market conditions.
This analysis also suggests that the state ownership/subsidy of fishing ports and associated distribution infrastructure (resulting again in substantial overcapacity) is likely to be a key factor in hindering a market solution to the problem of overfishing. In some countries there could also be problems with competition rules.
Finally it is important to consider the impact on consumers. The ‘market power’ of the vertically integrated firms would be severely limited. Under free trade they would be competing with fish suppliers from around the world, including produce from fish farms. Moreover, fish can be substituted for other foodstuffs and make up only a small percentage of the overall food supply. And the benefits would be substantial. A market solution to overfishing would deliver major benefits for consumers, with higher yields leading to lower prices and improved quality. At the same time, the inefficiencies, subsidies and special-interest influence associated with state-imposed fisheries policies would be avoided."
-Richard Wellings, "Is there a free-market solution to overfishing ?", Institute for Economic Affairs, 22 June 2017: https://iea.org.uk/is-there-a-free-market-solution-to-overfishing/
Around the same time, the Icelanders made another interesting discovery that had gone unnoticed by Wilde and most others--they found out that a free-market society fulfilled their needs and ensured their freedoms. Eight centuries before Adam Smith, the islanders on these shores developed the so-called Icelandic Commonwealth, where law was privately enforced, and individual farmers had a choice of allegiance between several chieftainships that served, in effect, as private protection agencies. Some libertarian economists have hailed this ancient experiment as an example of how the free market can provide legal protection.
This tradition of relying on the free market informs the actions of the Reykjavik government today--especially in the area of fishing, where transferable quotas have rationalized the industry. Unfortunately, the successful system is under threat from critics who want the government to confiscate and lease the quotas for revenue.
Since 1984, a system of individual, transferable share quotas in Icelandic fisheries has resulted in the industry becoming quite profitable. For example, from 1984 to 1997, the total value of the catch went up by than 35%. Yet even as the industry expands, the fish stocks in Icelandic waters have been slowly regaining their former strength--most importantly the cod stock, which was seriously endangered in the early 1980s.
The success of the Icelandic system stands in sharp contrast to the general failure of fisheries elsewhere. Fish stocks in the formerly fertile Grand Banks off Newfoundland and in Georges' Bank off New England have collapsed. European fishermen now only harvest a fraction of what they used to in fishing grounds in the North Sea and the Baltic. In other fisheries the picture is even bleaker. As they fight for survival, the companies in the business overfish, endangering stocks. In fact, the United Nations has proclaimed 1998 the "Year of the Ocean." Most fishing firms operate at huge losses, and fisheries in many countries have become a huge burden on taxpayers.
In Iceland, however, a combination of three factors made the Icelandic quota system possible. First, Iceland won the "Cod Wars" against the British. London opposed the extension of exclusive economic zones to 200 miles by sending in the Royal Navy to protect the British fishing fleet in 1958, 1972 and 1975, but eventually gave up. In 1975 the Icelanders were able to extend their exclusive economic zone and to set rules about the utilization of the ample fishing stocks within it. Decreasing catches had made the fishing vessel owners fully aware of the danger of overfishing, spurring them to work with government to find a solution.
The system works likes this: The government, on the advice of marine biologists and owners of fishing vessels, sets a total allowable catch each year in each fish stock of any commercial value. It then monitors the fishing vessels. On the basis of their catch history, the vessel owners are each allocated individual quotas. For example, if a fishing firm holds a 1% quota in the cod stock, and the total allowable catch for the fishing year is 250,000 metric tons, then this fishing firm may harvest 2,500 metric tons over the fishing year in whatever way it deems efficient. As the individual quotas are permanent, the fishing firms can embark upon long-term planning of the size and scope of their operations. And because the quotas are transferable, the more efficient firms will buy quotas from the less efficient ones, reducing the size and cost of the fishing fleet.
The introduction of individual, transferable quotas in the Icelandic fisheries is a big step toward establishing private property rights in fish stocks. It is well known that in the absence of property rights, natural resources will be over-exploited. Where there are no fences, there will be overgrazing. Similarly, with present technology, open access to fishing grounds will inevitably lead to overfishing: too many fishing vessels chasing an ever-dwindling stock of fish.
With the allocation of quotas in an annual allowable catch, however, Iceland's fishing grounds have been closed to all but the holders of these quotas. Quota-holders have gained an exclusive right to harvest the fish in Iceland's waters, just as the owners of parcels of land have an exclusive right to cultivate them. By gaining this right, the Icelandic vessel owners have become custodians of the fish stocks. Therefore, it's in their interest to maximize the long-term revenues from the fisheries. Indeed, in the last few years the owners of fishing vessels have been pleading for responsibility in setting the annual total allowable catch in the various stocks. They now have something to gain, or lose, from the long-term state of the stocks.
Nevertheless, the Icelandic quota system has its critics, who bitterly complain about how the quotas were initially allocated. Why didn't the Icelandic government auction off the quotas instead of handing them out, free of charge, to those vessel owners who happened to be harvesting fish in the years preceding 1984? Those critics do not, however, seem to realize that the initial allocation of the quotas was, by necessity, acceptable to the vessel owners. After all, the sea, which had been open for thousands of years, was now being closed off to all but the holders of quotas. Furthermore, the vessel owners were the only ones with a strong vested interest in maintaining access to the fishing grounds.
By allocating the quotas, however, the Icelandic government ensured that no one in the fishing community had anything to lose. The less efficient sold their quotas and left fishing altogether, while the more efficient bought quotas and used them to rationalize their operations. In recent years, as the quota system has proven to work quite well, and with fishing firms becoming ever more profitable, the critics have become increasingly vocal. They demand that Iceland's government appropriate the quotas now held by fishing firms, and then lease them to those firms for a limited period of time.
Taking this step would greatly reduce the incentive that the owners and managers of fishing firms have in preserving and, even more importantly, developing the fish stocks. But because many people resent the huge profits now being made in the fisheries, the critics have found a receptive audience in Iceland. It would be a tragedy if the Icelanders, in a sudden fit of resentment, throw away the quota system and thereby lose the third great discovery in their history."
-Hannes H. Gissurarson, "The Viking (And Free-Market) Solution to Overfishing", The Wall Street Journal-Europe, 2 novembre 1998: https://www.wsj.com/articles/SB910036683301134500
"Overfishing is often presented as a classic example of market failure. When individual fishing enterprises are competing, the benefits of winning the ‘race to fish’ accrue to the successful ones, while the costs of depletion are shared among all the fishermen in the fishery. There are therefore poor incentives for conservation – the so-called ‘tragedy of the commons’.
This is a simplistic interpretation, however. Market feedback mechanisms offer some protection to stocks. Declining yields will tend to force less efficient fishermen out of business, for example. Providing there is free trade in fish and substitutes are available in food markets, the combination of increasing costs and declining catches may not be offset by higher fish prices. The outcome will partly depend on the species in question. Its scarcity value, reproductive behaviour and migration patterns may affect the probability that overfishing leads to a collapse in stocks.
The history of the fishing industry shows overfishing has been hugely exacerbated by government intervention, in particular subsidies for uneconomic fishing businesses. These handouts have undermined the market mechanisms that would have helped to conserve stocks. The resulting overcapacity – too many vessels chasing too few fish – has strengthened the rationale for costly and bureaucratic regulation of the sector, as exemplified by the EU’s Common Fisheries Policy. As public choice theory would predict, such regulation has inevitably been subject to politicisation and lobbying by special interests, which has meant problems with overfishing have persisted. The creation of artificial property rights by governments, such as the Individual Transferable Quotas used in Iceland, has tended to deliver superior allocative efficiency compared with other forms of regulation, but has not been immune to special-interest influence or indeed discarding.
These problems raise the question of whether an unhampered market could solve the problem of overfishing. Clearly the removal of direct and indirect government subsidies would go a long way towards resolving the issue. However, it would not remove the tendency entirely and both yields and efficiency could still be suboptimal. While collapses would be less likely, they would not be impossible – and there are indeed examples that pre-date direct state subsidies to the industry.
There would therefore appear to be a trade-off between competition and efficiency. This is the case in many sectors, for example due to the ‘transaction costs’ resulting from competition, or because competition means economies of scale are lost (the rail industry is a classic example). Indeed it is a common misperception that unhampered markets inevitably produce a high level of competition. It depends on the characteristics of the sector concerned. One way markets can reduce transaction costs and capture economies of scale is through mergers and acquisitions.
In the fishing industry there are potentially major efficiency losses from competition in the form of the ‘race for fish’, both in terms of wasteful duplication of equipment, fishing effort and the depletion of stocks to suboptimal levels. There may therefore be strong incentives for fishing enterprises to merge or evolve into one large business (which could perhaps be some kind of cooperative) that held a near monopoly over fishing in a particular region. This dominant enterprise would then determine catch levels to maximise returns.
If fisheries remained ‘open access’, how could this structure be sustained? The market solution may be vertical integration. The dominant firm would merge with the harbours and/or the distribution operations in the region and perhaps even the fish processing industry, enabling it to exclude local competitors and to capture economies of scale that would act as a further market-based barrier to entry. Competitors from further afield would face much higher costs to reach the fishery. Nevertheless, initially the dominant firm might choose to deter them by deploying some of its vessels in a ‘race to fish’ in order to drive them elsewhere. Clearly there would be strong incentives to develop agreements between neighbouring firms not to stray into each other’s area of operation, to avoid the costs of such behaviour, and possibly also rules regarding migrating fish.
Subsidies from foreign governments to their own industries could upset this market outcome by artificially sustaining the ‘race for fish’, which raises issues regarding state protection of territorial boundaries within the current system of Exclusive Economic Areas. However, in principle there is no reason why these dominant firms or associations should not straddle existing national boundaries, with their geographical extent evolving according to market conditions.
This analysis also suggests that the state ownership/subsidy of fishing ports and associated distribution infrastructure (resulting again in substantial overcapacity) is likely to be a key factor in hindering a market solution to the problem of overfishing. In some countries there could also be problems with competition rules.
Finally it is important to consider the impact on consumers. The ‘market power’ of the vertically integrated firms would be severely limited. Under free trade they would be competing with fish suppliers from around the world, including produce from fish farms. Moreover, fish can be substituted for other foodstuffs and make up only a small percentage of the overall food supply. And the benefits would be substantial. A market solution to overfishing would deliver major benefits for consumers, with higher yields leading to lower prices and improved quality. At the same time, the inefficiencies, subsidies and special-interest influence associated with state-imposed fisheries policies would be avoided."
-Richard Wellings, "Is there a free-market solution to overfishing ?", Institute for Economic Affairs, 22 June 2017: https://iea.org.uk/is-there-a-free-market-solution-to-overfishing/
