Grafton, R. Quentin

English

Research Papers in Economics

125
Marine Resource Economics, Volume 11, pp. 125–127 0738-1360/96 $3.00 + .00
Printed in the U.S.A.  All rights reserved.           Copyright © 1996 Marine Resources Foundation
Implications of Taxing Quota Value in an
Individual Transferable Quota Fishery:  Comment
R. QUENTIN GRAFTON
University of Ottawa
In a recent paper in this journal Johnson (1995) examines the effects of imposing
resource rentals on fishers in an individual transferable quota (ITQ) fishery. He
shows that a tax on quota values is not neutral if the marginal opportunity cost of
fishing effort is increasing in effort and if fishers are able to influence the setting of
the total allowable catch (TAC). Johnson uses this result to argue against a tax on
quota value and asserts that such a tax would have a negative impact on the incentives of
fishers to undertake cost-reducing activities. In his concluding remarks, he notes that it
would seem equitable for fishers to pay for the cost of defining and policing ITQs.
He suggests that the charges to cover these costs should be paid in the form of pro-
portional lump sum fees based on the share of the TAC held by each fisher.
The paper demonstrates the complexities of rent capture in renewable re-
sources—a topic that has been neglected in the literature. It is also one of the few
papers to recognize the importance of fishers’ influence on the setting of the TAC in
ITQ fisheries. Nevertheless, the paper may leave the reader with the impression that
the resource rent should be left with the industry and that fishers should contribute
only to the costs of management through lump sum fees. The realities of fisheries
management suggest that these conclusions may not be valid.
First and foremost, it should be realized that ITQs alone will not lead to a first-
best outcome in the presence of in-season stock and congestion externalities (Boyce
1992). Lack of compliance with ITQ regulations, imperfect competition, informa-
tion problems, and other factors also suggest that ITQs will not result in an efficient
outcome (Grafton 1996). The important point, however, is that ITQs are a desirable
instrument in fisheries management if they result in a superior situation to current
practice or other management alternatives.
The same conclusion could be made in the context of collecting resource rents,
namely, in a second-best world, rent capture may not result in an efficient outcome
but the benefits of resource rentals may outweigh the costs. Grafton (1994) makes it
clear that with heterogeneous fishers under uncertainty and an exogenous TAC, it
may be desirable to use a method of rent capture that reduces the variance faced by
fishers. An ad valorem royalty, profit and net cash flow charge reduce the output
price uncertainty faced by fishers and can potentially increase the expected resource
rent in the fishery. In contrast, a quota tax and an equal or proportional lump sum
fee do not. In fact, with an exogenous TAC and for the same total amount of rent
captured, a quota tax based upon a uniform quota price and a proportional lump sum
fee impose identical burdens in terms of resource rentals paid by fishers. Thus, cer-
tain methods of rent capture may or may not reduce resource rents depending on the
circumstances of the fishery, and in particular the heterogeneity of fishers, uncer-
tainty, and fishers’ influence on setting the TAC.
R. Quentin Grafton is assistant professor in the Department of Economics, University of Ottawa, P.O.
Box 450, Station A, Ottawa, Ontario, Canada K1N 6N5; e-mail: qgrafton@uottawa.ca.Grafton 126
Johnson makes an important point that rent capture is predicated on the fact that
quota holders only own a share of the resource flow from the fishery and do not own
the resource stock. This attenuation of the property right also has implications be-
yond that of rent capture. If ITQs only provide a property right over the resource
flow, quota holders are likely to have a greater share of the benefits relative to the
share of the costs from not reducing TACs. This is analogous to a free rider problem
which can lead to a higher than desirable total harvest whenever quota holders are
able to set the TAC themselves. Thus, if fishers are able to influence the setting of
TACs—as emphasized by Johnson—this may affect the sustainability of the re-
source.
A major theme of the paper is the potentially negative impact of resource rent
capture on the incentives for fishers to innovate. Grafton (1994 and 1995) makes
this point but only in reference to the capture of intra-marginal rents from fishers. It
is certainly possible that resource rent capture could affect innovation, but the in-
centive to innovate is most likely determined by the existence of differential or in-
tra-marginal returns among fishers. Such a view accords with Schumpeter’s notion
that innovation is the act by which firms attempt to collect entrepreneurial profits
which “…are the prizes offered by capitalistic society to the successful innovator.’’
(Schumpeter 1950 p.102). Thus, the incentive problems associated with resource
rent capture emphasized by Johnson may be exaggerated.
To obtain a more complete understanding of the points made by Johnson, it is
useful to discuss the consequences of not undertaking rent capture. In a number of
fisheries, the market price of quota multiplied by the quota holdings of some indi-
vidual fishers can be worth several million dollars. The high cost of purchasing and
leasing quota may pose an important barrier to entry in ITQ fisheries where capital
markets are imperfect. To the extent that new entrants may be younger fishers who
may be more willing to undertake innovation, it is possible that by not capturing the
resource rent and keeping quota prices higher than they would otherwise be, the to-
tal future returns from the fishery may be reduced. When quota is distributed gratis
to fishers, failure to impose resource rentals may also make the setting of the initial
individual quota allocations more difficult for the resource owner. This is because
even small changes in the initial allocation may represent large changes in wealth
for fishers. To the extent that dissatisfaction with the initial quota allocation (due to
wealth considerations) can have a negative impact on fisheries management
(Cunningham 1994), resource rent capture can mitigate the problem.
Allowing the resource rent to accrue to the first generation of quota holders also
begs the question, exactly who should benefit from ITQs? It is has been argued else-
where that if resource rents are sufficiently large, quota holders should pay the re-
source owner(s) more than just an amount equal to the costs of management. The
existence of substantial resource rents is also likely to generate rent-seeking behav-
ior. Fishers who are not participants in ITQ fisheries, where resource rents and quota
values are high, may lobby for free access to the resource. For example, high returns
in two individual vessel quota snow crab fisheries in Atlantic Canada led persons
outside of the fishery to lobby for the right to harvest crab. The result was that in
1995, 16% and 9% of the TAC in the two fisheries was allocated to new entrants
(Canada Department of Fisheries and Oceans April 1995)—thus dissipating a share
of the resource rents.
Johnson emphasizes the potential negative consequences of capturing resource
rents from ITQ fisheries. This comment shows that the subject is more complex than
it first appears. It also suggests that it may be desirable to impose resource rentals
and capture a share of the resource rent over and above the costs of management.Taxing Quota Value 127
References
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Implications of Taxing Quota Value in an Individual Transferable Quota Fishery.

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IMPLICATIONS OF TAXING QUOTA VALUE IN AN INDIVIDUAL TRANSFERABLE QUOTA FISHERY: COMMENT

IMPLICATIONS OF TAXING QUOTA VALUE IN AN INDIVIDUAL TRANSFERABLE QUOTA FISHERY: COMMENT

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