An Economic Analysis of Ocean Fisheries in the Free Market

AN ECONOMIC ANALYSIS OF OCEAN FISHERIES IN THE FREE MARKET

Fish is a protein that many cultures incorporate into their everyday diets. When resources are poorly managed, and mankind’s selfishness gets in the way, the fisheries and marine environments, in which this protein comes from, are destroyed which consequently affects communities that depend on fisheries for food and income.  Many coastal societies have become devastated because of the  yields of fish depleting rapidly and the source of food that was once seen as plentiful now is viewed as nearly extinct. Fishing excessively in national and international waters has created many issues for the sustainability and population of the marine environment.  There are many causes of the destruction in our marine environments, such as global warming, acidification, and destruction of coral reefs. These factors destroy the aesthetic and leave the fisheries depleted. Of all the factors and/or causes for the destruction of marine habitat,  the most destructive and man driven is overfishing.  Overfishing is caused by the open accessibility that the free market allows for the large fishermen community. Overfishing causes disturbance in ecosystems, when one fish is overfished it causes the prey of that organism to also reduce and thus sets off a chain reaction. This is a great concern for economists and biologists alike.  Marine biologists and economists attempt to figure out ways to minimize how fast the fisheries are depleting while also preserving specific fish by incorporating restrictions. In their efforts to do this, the government implements many approaches to overcome the tragedy that overfishing causes. The effectiveness of the approach used to reduce the destruction on fisheries includes benefits and consequences that need to be analyzed by marginal analysis. This paper will examine how governmental regulation attempts to correct the market failure of fisheries and reduce the overconsumption of fish. This analysis will also include a discussion on how externalities contribute to the inefficiency facing the fish market and how monopolization may occur and how to avoid it. 

In a market without limitations overfishing is prevalent and comes with many cons. Markets have quotas on what can be fished and when, but this creates a great incentive to fish rapidly (A Rising Tide) for fishermen and makes them feel rushed in having to catch as much fish as possible. To prevent this rushing feeling the system of Individual Transferrable Quotas (ITQ) has been presented as a solution. This system establishes catch limits amongst fishermen to create a sustainable, appropriate catch amount for fishermen that also minimizes depletion of fisheries. Studies have been conducted using this method and the results have been that fisheries are less likely to collapse when this system is incorporated. Another benefit to this solution is that it allows fishermen time to fish so that they do not need to go out on terrible weather days to catch from the low supply of fish. With this solution in mind, it provides an opportunity cost of time as an incentive for fishermen because the ITQs entitle fishermen rights that reduce the hastening feeling that generally results in fishermen fatalities.

When we analyze the market before and after the implementation of ITQs we notice changes to both supply and demand. In the market without ITQ we have a heavy demand for fish. This heavy demand leads to overfishing which then makes the supply depleted resulting in a shortage. Fish season operates on a few days in which many fishermen will risk their lives to catch the fish. With such a high demand for fishing but not enough fish, this results in the destroying of fisheries that we have and also creates predictions that fisheries will all disappear very soon. This market can be corrected. Implementing the ITQs creates a long-term right for fishermen and guarantees they will have fish. It also establishes limitation on overfishing which improves sustainability for the future fisheries, resulting in halted collapse rates. In an article written by Clare Leschin- Hoar, a member of NPR, she explains how fishermen benefit from changing the method of fishing during the seasons. She analyzes how the catch-share method changes the market and creates more stability while establishing the benefit that fishermen have a longer window of time to harvest due to the quota system. This is a contrast to the traditional fishery-management that opens and closes during specific seasons and days. The biggest benefit of the individual quotas is that it allows fishermen guaranteed time and supply. (NPR)  With this method in use it establishes a long-term equilibrium where supply is satisfactory for the demand.

In a marginal analysis in which the three assumptions of humans can be applied, marginal coasts and benefits arise. The three assumptions that an economists must keep in mind when analyzing the marginal benefits and marginal costs of the supply and demand curve of fish markets are: people are rational, people respond to economic incentives, and optimal decisions are made at the margin.  When these assumptions are fully understood, the analysis of costs and benefits can be made. The marginal cost in this market would be time- fishermen have to give time and not overfish when the ITQ system is implemented but they are rewarded with the marginal benefit of having a reliable share in which they will be supplied with fish. This trade-off of time for a guaranteed supply allows the market meet equilibrium and halts the collapse rates in fisheries. In The Economist, the benefits of this method are explained by “Fishermen therefore have an interest in good management and conservation because both increase the value of their fishery and of their share in it. And because shares can be traded, fishermen who want to catch more can buy additional rights rather than resorting to brutal fishing tactics.” (A Rising Tide). While many fishermen want to cash out in the present and worry about the long-term effects after the fact, they need to keep the future in mind. If they minimize their harvest in the present, then in the future the yield of fish will increase with the decrease of overfishing. This will then provide more profit for the fishermen.  With all this in mind, it proves that the market with ITQ implemented results in equilibrium with supply and demand. Obvious marginal benefits and costs present themselves and prove to be beneficial for the long-term effect of fisheries and fishermen profit.

In economics, market failure arises from inequality in supply and demand. From the perspective of the fishing market, this market failure is caused from an increased demand that cannot be sufficiently supplied. in microeconomics the market failures are shown by a state in which the market is at a disequilibrium when quantity demanded, and quantity supplied are not equivalent.  (Investopedia) A major issue that presents itself for fisheries is that the demand for fish is so high, especially during the traditional fishing seasons where many fishermen try to catch as much as possible, and this causes a depletion.  This destruction is the result of fishermen not having official catch limits and fishing until told to stop. This is known as overharvesting and before the preposition of ITQs was initiated as an approach to overfishing, majority of catch targets were caught at a rapid rate. The severe consequences that are expected in this market failure are the extinction of specific desirable fish, which would eventually lead to a disturbance in the ecosystem- resulting in a destroyed marine environment (Economics for the 21^st Century). 

Whenever there is market failure, positive and/or negative externalities arise.  Externalities are the side effects in economics and are the benefits or costs affect those not directly involved in consumption or in production. As Adam Smith explained, externalities are used to explain the social benefits of one’s selfishness. It is a system where if consumers do not have to pay they will not, and if producers are not paid they will stop production (Econlib).  Positive externalities are seen as underproduction while negative externalities are overproduction. Figure 1.1 shows how negative externality arises in the overuse of the common resource of fish. Both positive and negative externalities result in equilibrium not being met, so deadweight loss is found. This deadweight loss is caused when the market is not producing at equilibrium. A solution to this issue is proposed by the implantation of ITQs, which guarantee fishermen their rights to catch fish, but also limit and prohibit certain fish. This is referred to as a catch share. These catch shares are introduced to reduce capitalization, protect stocks and improve the overall condition of the market (Buck 1995). The use of these shares aims to allow fishermen to have their own private fishing rights while also allowing this share to be a common resource for fishermen all around.  Economists use the ITQs for fisheries that are struggling because as a rational human being with an ITQ there is no reason to “overfish” when you have a right to do it in the future.   This implementation promotes long-term sustainability in yields of fish and may even result in increased biodiversity.

The quotas propose a system in which the fishermen have the luxury of time when it comes to fishing, and they won’t have to feel like there is some sort of competition for obtaining the perfect fish (Octo).  The reason behind ITQs being introduced is because fisheries suffer the consequence of the ‘tragedy of the commons’.  This is where the common resource tends to be overused due to being non-excludable and open to the public. When a common good is overused it is generally being used as economically inefficient. The Coase Theorem proposes a solution to this inefficiency and a way to overcome the problem and create economic efficiency.  This theorem proposes that when parties negotiate they can find a price that covers the negative externalities and the common resources will not be as easily overused. Due to this suffering from overconsumption and the impact that increased human use had on the marine environment, regulations needed to be put in place and the market had to change from a free market to a market with a few limited restrictions. Government intervention with the implementation of ITQs has been beneficial for the fisheries and is seen as a good approach at using Coase theorem to correct the market failure. Incorporating this theorem internalizes the negative externality by making the benefits for the fishermen equal to that of what is socially efficient and permits for a more efficient use of the resource. Figure 1.2 shows the market during market failure with the deadweight loss present and shows the market after the catch shares are implemented at the socially efficient level. The use of the theorem and ITQs  corrects the present market failure of fisheries by reducing the overfishing that occurs because of lower yields of fish and fishermen racing for the perfect catch.

It is also useful to analyze this issue of market failure in fisheries by analyzing the Prisoner’s Dilemma, it is a neorealist perspective of how fishermen will respond to the ITQ system. It is believed that “in this case, fishermen may predict that all other fishermen will try to catch as much as they can before the stocks run out.” (EconomicsOnline). As humans are rational, this theory proposes that with multiple interactions, humans will realize that it is in their self-interest to cooperate, so cheating will not be an issue.  This also aligns with the realist theory that individuals try to maximize their profits, even if it is selfish. When we use both theories with market failure we see that fishermen will instinctively be opposed to the ITQs and believe that other fishermen will try to “cheat the system”, but once implemented they will realize the long term benefits it proposes and how regulated the system is. The market failure and ITQs will only truly work and correct the issue of overfishing if the fishermen and governments are able to continuously follow and limit the overconsumption of fish.

An advantage of the ITQs are that the shares are the ownership of the fishermen and they are able to buy, sell, or trade the shares in any way they want (Ff.org). This is advantageous to many fishermen because those that want to have more shares must purchase from other fishermen and both parties benefit from this mutual agreement, rather than one fishermen getting all the fish and others without. This in turn improves the economic efficiency for the fishery and even encourages some fishermen to stop fishing and lease their ITQs. (Buck 1995) The shares also benefit the safety of fishermen because with time and incentive to wait, they go out with safer weather and tend to steer clear of hazards. A disadvantage of ITQs is that it may result in high-grading, where the fishermen will only retain the best quality of fish, leaving the lower quality fish that count against the quota (Buck, CRS). Another disadvantage is that ITQs may also increase the price of seafood because there will be no race to fish and the fish supply for markets would decrease, but as an advantage the seafood quality would improve. The ITQ property also creates more permanent and stable jobs, but also leads to a smaller work force, being able to complete the tasks more efficiently with fewer people. The government implementation of ITQs shares benefits and consequences but with catch shares the government does correct the market failure and reduces the foreseeable consequences scientists and economists predict. With the integration of catch shares, fishermen have an incentive to abide by the government rules and follow the regulated quotas. While there are evident disadvantages to this solution, the benefits weigh out the cons.

With the creation of the ITQ systems, the once open free market becomes a limited entry market that allows for trade and market price fixing. This, however, goes against the antitrust laws that are put in place. These systems also allow for the possibility of mergers. Mergers are the combination of companies or shares to create a single entity. The transferability of the quotas permits fishermen to transfer the ownership of the quota by means of selling. The Sherman Antitrust Act prohibits monopolies and trade with price fixing (Milliken, 44). This creates concern with how fishermen in this limited entry market transfer ownership. It creates an opportunity for a monopoly to be created if one quota holder obtains the vast majority of share. This shareholder, or monopolist, can then fix market prices and use an unfair economic advantage over the other fishermen, and they will always have control over the monopoly. In a monopoly only one single seller exists and controls the price of the goods, this allows complete power to be given to one individual or business. This would have a negative impact on fisheries because it completely violates the antitrust laws put in place and would defeat the overall purpose of the ITQs. They are set up to create ownership for fishermen and equity for every single fishermen in the seas.

While there is a foreseeable threat that the fish market could become a power market, there are some possible solutions that can be put in place to minimize the threat. A solution that could prevent monopolization of the fisheries from occurring would be to limit the number of quotas the fishermen can trade between themselves. This would reduce the opportunity for a quota holder to obtain a substantially larger number of quotas and hinder a monopoly from being created. There would be a limit on how many quotas each fishermen could have. This preposition ensures that each fishermen has an equal number of quotas and that no individual obtains superior authority over the fisheries. Another possible solution would be to create zones in the marine environments that are considered “no-fish” areas. This proposes opportunity for certain areas within the fisheries to increase sustainability and biodiversity while the species are permitted to reproduce at a natural rate.

As humans, the overconsumption of a good that seems bountiful, cheap and can produce a profit for an individual, it is reasonable to understand why overfishing is a consequence that the markets face now. The use of ITQs in the fish market has proved to reduce the rate at which species become destroyed. The positive aspects of government intervention are that fishermen have entitlement to fishing that prevents their fear of missing out on the best fish. It does require the government and fishermen to be mindful about maintaining the market as free as it can be and not lead towards a monopoly. A monopoly would directly counteract the governmental antitrust laws. The consequences of ITQs are that they are transferable which as stated before can result in an individual or business obtaining superiority over the fisheries and exploiting the fishermen. The main goal of economists and conservationists and other communities that the fisheries impact is to maintain the biodiversity and make sure the fisheries are able to continue on. The economic viewpoint of fisheries is that they are a market that provides income and food for many. For marine biologists and conservationists, they are habitat to a myriad of species. The fishing market has not yet reached the point of equilibrium because the demand for fish will always be greater than the supply. With this in mind however, humans rationally know if overfishing continues fish species will become extinct and marine ecosystems will be destroyed permanently. It is extremely important that individuals attempt to realize the dangers of overconsumption and how externalities affect the market. Since fisheries are a common public good, government intervention is significant in the future success of the fisheries and economic efficiency for producers and consumers in this market. It is also important that the ITQs be used as a system in which fishermen have rights to fish and do not need to engage in overfishing. The intervention of government can be seen as a social benefit in which both consequences and benefits arise, but without suffering the minuscule consequences now, the environment in the future will be far beyond repair.

Figure 1.1: This graph shows the fish market with negative externality. (Market Failure)

Figure 1.2: This graph shows the free fish market, and shows the efficient market when ITQs are in place.

Bibliography

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