Markets often fail to deliver socially-efficient outcomes where a natural resource is characterised by conditions of open access. A resource is described as an open access resource when it is not possible to prevent anyone who wishes to use it from doing so, or where the cost of imposing such restrictions is prohibitively high. Examples of open access resources include
*natural forest areas, including tropical moist forests
*acquifers (i.e. surface and underground fresh water stocks)
*the earth’s atmosphere
To illustrate why open access conditions often lead to inefficient outcomes, let us consider the case of a marine fishery. As we shall see, marine fisheries are prone to being over fished. In an extreme case, the stock of a particular species may be driven to a level at which it cannot recover, and the species becomes extinct.
There are two reasons why excessive harvesting is likely to occur in these circumstances. First, the actions of each fishing boat imposes external costs on all others. When one boat withdraws fish from the sea, the total stock is reduced, and so it becomes more difficult for others to catch fish. Each fishing vessel incurs private or internal costs, but also imposes external costs on others by increasing the amount of effort that is required to catch a given quantity of fish. The excessive harvesting arises because the owner of each vessel takes account of only private revenues and costs in deciding upon the amount of fishing to be undertaken. For a socially efficient outcome, all costs – private and external – should be included in this decision.
In conditions of open access, whenever private profits can be obtained, more vessels will tend to be attracted to fish in these waters. Where the number of boats is large, individualistic, uncooperative behaviour is likely to prevail. Even though each fisherman realises the effects of his actions on others, he is likely to proceed in a self-interested way, grabbing whatever he can on the assumption that everyone else is doing the same.
The second cause of inefficiency arises from the lack of incentives to “invest” in future stocks. When fish stocks are low, rational behaviour suggests that boat owners reduce their catch today to allow stocks to recover and grow. Investing in the future in this way offers the prospect of larger returns in the future for small costs today. But the open access regime implies that this action is very unlikely; any individual who invests in this way is unlikely to be able to appropriate the returns on his investment. The returns ultimately become available to the whole industry, not to the individual “investor”. Moreover, a free-rider problem exists here. Any one individual can benefit by others agreeing to reduce their catches, but by increasing his own catch (compare this with the cartel model we discussed earlier).
Market forces alone will not generate efficient collective outcomes because each fisherman will equate his private marginal costs and marginal benefits. The two kinds of externalities we have just described will drive a wedge between what is privately and what is collectively optimal. Clearly it will often be in the interests of fishermen collectively to agree to an optimum overall catch, together with quotas for individual fishing vessels, provided all parties to the agreement can be relied upon to maintain the agreement. This is most unlikely in open access conditions with large numbers of players in the industry; even if newcomers could somehow or other be prevented from gaining access, the transactions costs of creating and policing agreements will tend to be high, reducing the likelihood of efficient bargaining outcomes being attained.
It is common for governments, or supranational institutions such as the European Union, to intervene in and regulate the fishing industry. One common approach is to establish limited rights of access through territorial restrictions on fishing activity. However this can be at best only a partial solution to over-fishing, as it does not alter the open access to domestic fishermen. If fewer non British boats fish in British waters, for example, this may just encourage British vessel owners to step up their efforts. Regulation might also consist of attempts to impose limits on the size of the fishing fleet, and on the amount of fishing effort that is permitted. Some recent European regulatory policy has been directed at fishing effort, placing restrictions on seasons in which designated species may be harvested and the number of days on which vessels may put out to sea.
Other regulatory approaches tried include quotas on permissible catches (this is currently the major type of regulation in European waters) and controls relating to the type of equipment (boats, types of net, mesh sizes etc.) used in marine fishing. There seems to be little to suggest that any of the schemes we have considered here have met with much success in terms of reducing over-fishing. Moreover, the costs to fishermen of these types of control are immense. This is not surprising when one realises that they all share the characteristic of being command-and-control instruments, and do not provide patterns of incentives to vessel owners that address the root causes of overfishing.
One method that has been successful in New Zealand fisheries (The demise of the small fisher? A profile of exiters from the New Zealand fishery [An article from: Marine Policy]) – and could be more widely adopted in the future – is the use of transferable fishing quotas. These work in very similar ways to the transferable permit schemes we discussed earlier, and have similar advantages over more conventional forms of command-and-control.