The Costs of Restrictions in Tradable Permit Programs

Download or read book The Costs of Restrictions in Tradable Permit Programs written by Kailin Kroetz and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The goal of this dissertation is to examine how the design of tradable permit programs can have economic and non-economic ramifications. Although originally conceived as a market-based policy instrument with the potential to internalize environmental externalities, the classic tradable permit program design is often supplemented with additional rules such as use restrictions and restrictions on trade. These additional rules are often considered for inclusion because, at a policy-making level, objectives can be broader than internalizing an externality and improving economic efficiency. The focus in this dissertation is on trading restrictions, a common response to accommodate community, cultural, and other non- economic goals. More specifically, the focus is on the costs and benefits of restrictions, singularly and interactively, and how the costs and benefits accrue over time. A background on tradable permit programs and the contribution of the dissertation to the literature is provided in Chapter 1. This is followed in Chapter 2 by an overview of the individual transferable quota (ITQ) program that was implemented in 1995 to manage the Alaskan halibut and sablefish fisheries. A long-running tradable permit program with significant restrictions on trade, this program is well-suited to empirically evaluate the impacts of restrictions both in the short and long term. The analyses summarized in the remaining chapters are based on data from this program. The next chapter, Chapter 3, introduces a structural dynamic model of the exit of capital and labor in the fishery. The management policy in place before the tradable permit program, limited entry, results in a different equilibrium capital and labor mix than that associated with the tradable permit program. Therefore, a model is formulated that allows for non-instantaneous adjustment. Using the estimated structural coefficients it is possible to construct counterfactual scenarios without restrictions in place. Then, the efficiency costs of imposing restrictions in the fishery can be estimated by differencing the profit in each of the two scenarios (with and without restrictions in place). In Chapter 4 permit trading data from the later period in the fishery is used to estimate the long-run costs of restrictions. Specifically, a policy experiment in which both restricted and unrestricted permit prices are observed is exploited, and a reduced form regression model is used to estimate the difference between the permit prices. This difference is then used to calculate the cost of the restrictions. In the final empirical chapter, Chapter 5, the prior models and results are used to assist in developing a better understanding of the tradeoffs between restrictions advancing non-economic objectives (e.g. keeping small boats in the fishery after the tradable permit program is implemented) and economic efficiency. On one hand, restrictions can result in larger fleet sizes and keep vessels from more remote areas fishing. On the other hand, restrictions decrease the resource rent. Furthermore, restrictions devalue an asset granted to fishermen in smaller and more remote areas. The analysis in Chapters 3-5 provides a retrospective examination of the policy choices made when the Alaskan halibut and sablefish ITQ program was designed. The results suggest that quantification and consideration of the potential costs of restrictions are important steps in policy decision-making when balancing the economic costs of restrictions with potential benefits. The results of the dynamic model suggest that restrictions impact the evolution of the fishery in several ways. First, the type of capital that remains in the program is influenced by the restrictions in place. Restrictions were successful in altering the distribution of capital in the fishery. Specifically, with restrictions in place smaller vessels remain in the fishery than would if restrictions had not been implemented. Additionally, the dynamic model suggests there are efficiency costs to restrictions. In particular, the counterfactual scenario without restrictions is characterized by fewer vessels, each fishing greater quantity. Furthermore, the median variable profit per vessel is estimated to be approximately 10% higher.In the long-run analysis using observed data on permit trading prices, the costs of restricting trade are found to be large and significant. In the long run it is estimated that restrictions in the halibut fishery result in a 32% reduction in the value of the fishery, and in the sablefish fishery restrictions reduce the fishery value by 22%. In addition to significant costs, however, there is evidence that the restrictions influenced the outcome of non-economic variables in the fishery. Along dimensions identified by managers as important non-economic criteria, such as ensuring a diversity of vessels sizes and keeping small-scale fishermen in remote communities fishing, the observed scenario with restrictions in place out-performs the counterfactuals.