Friday, September 26, 2008

Tragedy of the Commons and Economies of "Scales"

THE ECONOMIST -- Like most other fisheries in the world, Alaska’s halibut fishery was overexploited—despite efforts of managers. Across the oceans, fishermen are caught up in a “race to fish” their quotas, a race that has had tragic, and environmentally disastrous, consequences over many decades. But in 1995 Alaska’s halibut fishermen decided to privatize their fishery by dividing up the annual quota into “catch shares” that were owned, in perpetuity, by each fisherman. It changed everything.

In the halibut fishery the change in incentives that came from ownership led to a dramatic shift in behaviour. Today the halibut season lasts eight months and fishermen can make more by landing fish when the price is high. Where mariners’ only thought was once to catch fish before the next man, they now want to catch fewer fish than they are allowed to—because conservation increases the value of the fishery and their share in it. The combined value of their quota has increased by 67%, to $492m.

By giving fishermen a long-term interest in the health of the fishery, individual transferable quotas (ITQs) have transformed fishermen from rapacious predators into stewards and policemen of the resource. The tragedy of the commons is resolved when individuals own a defined and guaranteed share of a resource, a share that they can trade. This means that they can increase the amount of fish they catch not by using brute strength and fishing effort, but by buying additional shares or improving the fishery’s health and hence increasing its overall size.

Sadly, most of the rest of the world’s fisheries are still embroiled in a damaging race for fish that is robbing the seas of their wealth. Overfished populations are small, and so they yield a small catch or even go extinct.

For example, consider the situation of collapsing blue crab industry in Maryland, which was so bad this year that the "federal government is bailing out hard-pressed watermen with a disaster declaration."

Maryland lawmakers had sought the declaration by the Commerce Department since May, after Virginia posted a record-low harvest for the delectable crustaceans and Maryland had its lowest catch since 1945. Crabs remained the last thriving fishing industry in the Chesapeake until the 1990s, when pollution and overfishing finally took their toll. The stock is down by about 65% since 1990, according to Virginia and Maryland officials.

MP: Instead of another federal bailout for the blue crab industry ("too tasty to fail"?), maybe lawmakers should consider ITQs instead?

HTs: NCPA (halibut) and Peter Grose (blue crab)

See related
Economist story on privatizing fisheries.


At 9/26/2008 10:02 AM, Anonymous Anonymous said...

Replace fish with oil and you've got opec. Are you in favor of free trade or cartels?

Don't free markets benefit the consumer? Isn't competition desirable to reduce prices?

Isn't this an example of why free markets are not always in the public interest?

Who decides when a free market is in the public interest and when it isnt'?

At 9/26/2008 10:14 AM, Anonymous Anonymous said...

Excellent example of free market necessity and property rights to maintain values.

At 9/26/2008 10:37 AM, Blogger Justin M Ross said...

To "anonymous":

This story demonstrates that private property allows free markets to work for the public interest. Previously, the government had failed to assign property rights, a private institution emerged to do it for them.

The moral of the story is not "when do free markets work in the public interest" but rather "what conditions are necessary for free markets to work in the public interest."

One important condition is private property rights.

At 9/26/2008 12:04 PM, Anonymous Anonymous said...

Wall Street Executives Scored $3 Billion as Banks Rose and Fell

And they want the taxpayer to bail them out? Uh-Uh

At 9/26/2008 1:05 PM, Blogger Marko said...

This reminds me of the river in NY (can't remember the name) that was only finally cleaned up when the government gave ownership of the river to the people, along with associated property rights. The people on the river could then bring suit against polluters, and things improved dramatically.

This is the kind of stuff government should be doing - providing mechanisms to support private property rights, and granting private property rights (such as maintaining title and stuff). Otherwise, the government is basically saying it owns the fish, and the rivers,etc. Thanks for finding this Mark!

At 9/26/2008 2:23 PM, Blogger juandos said...

anon @ 10:02 AM whines: "Isn't this an example of why free markets are not always in the public interest?"...


Thanks for that... I needed a chuckle today...

At 9/26/2008 3:00 PM, Anonymous Anonymous said...

The only issue I have with this sort of scheme is that incumbents usually get their shares for free, giving them a massive advantage over new players.

At 9/26/2008 8:07 PM, Anonymous Anonymous said...

How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable

Terry Jones
Wed Sep 24, 7:19 PM ET

One of the most frequently asked questions about the subprime market meltdown and housing crisis is: How did the government get so deeply involved in the housing market?

The answer is: President Clinton wanted it that way.

Fannie Mae and Freddie Mac, even into the early 1990s, weren't the juggernauts they'd later be.

While President Carter in 1977 signed the Community Reinvestment Act, which pushed Fannie and Freddie to aggressively lend to minority communities, it was Clinton who supercharged the process. After entering office in 1993, he extensively rewrote Fannie's and Freddie's rules.

In so doing, he turned the two quasi-private, mortgage-funding firms into a semi-nationalized monopoly that dispensed cash to markets, made loans to large Democratic voting blocs and handed favors, jobs and money to political allies. This potent mix led inevitably to corruption and the Fannie-Freddie collapse.

Despite warnings of trouble at Fannie and Freddie, in 1994 Clinton unveiled his National Homeownership Strategy, which broadened the CRA in ways Congress never intended.

Addressing the National Association of Realtors that year, Clinton bluntly told the group that "more Americans should own their own homes." He meant it.

Clinton saw homeownership as a way to open the door for blacks and other minorities to enter the middle class.

Though well-intended, the problem was that Congress was about to change hands, from the Democrats to the Republicans. Rather than submit legislation that the GOP-led Congress was almost sure to reject, Clinton ordered Robert Rubin's Treasury Department to rewrite the rules in 1995.

The rewrite, as City Journal noted back in 2000, "made getting a satisfactory CRA rating harder." Banks were given strict new numerical quotas and measures for the level of "diversity" in their loan portfolios. Getting a good CRA rating was key for a bank that wanted to expand or merge with another.

Loans started being made on the basis of race, and often little else.

"Bank examiners would use federal home-loan data, broken down by neighborhood, income group and race, to rate banks on performance," wrote Howard Husock, a scholar at the Manhattan Institute.

But those rules weren't enough.

Clinton got the Department of Housing and Urban Development to double-team the issue. That would later prove disastrous.

Clinton's HUD secretary, Andrew Cuomo, "made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis," the liberal Village Voice noted. Among those decisions were changes that let Fannie and Freddie get into subprime loan markets in a big way.

Other rule changes gave Fannie and Freddie extraordinary leverage, allowing them to hold just 2.5% of capital to back their investments, vs. 10% for banks.

Since they could borrow at lower rates than banks due to implicit government guarantees for their debt, the government-sponsored enterprises boomed.

With incentives in place, banks poured billions of dollars of loans into poor communities, often "no doc" and "no income" loans that required no money down and no verification of income.

By 2007, Fannie and Freddie owned or guaranteed nearly half of the $12 trillion U.S. mortgage market -- a staggering exposure.

Worse still was the cronyism.

Fannie and Freddie became home to out-of-work politicians, mostly Clinton Democrats. An informal survey of their top officials shows a roughly 2-to-1 dominance of Democrats over Republicans.

Then there were the campaign donations. From 1989 to 2008, some 384 politicians got their tip jars filled by Fannie and Freddie.

Over that time, the two GSEs spent $200 million on lobbying and political activities. Their charitable foundations dropped millions more on think tanks and radical community groups.

Did it work? Well, if measured by the goal of putting more poor people into homes, the answer would have to be yes.

From 1995 to 2005, a Harvard study shows, minorities made up 49% of the 12.5 million new homeowners.

The problem is that many of those loans have now gone bad, and minority homeownership rates are shrinking fast.

Fannie and Freddie, with their massive loan portfolios stuffed with securitized mortgage-backed paper created from subprime loans, are a failed legacy of the Clinton era.

At 9/26/2008 10:31 PM, Blogger bobble said...

"Sadly, most of the rest of the world’s fisheries are still embroiled in a damaging race for fish that is robbing the seas of their wealth."

sorry MP, but isn't that the "free market" at work?

mmmmmm, halibut!

At 9/27/2008 8:13 AM, Anonymous Anonymous said...

"sorry MP, but isn't that the "free market" at work?"



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