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2.1 The Size, Direction and Implications of the Ecological Externality
2.2 Remedies
2.3 The International Aspect

Ocean ranching implies the addition of organisms into the marine environment. Due to the limitations of primary production and habitat, the biological carrying capacity of the environment is subject to an upper bound. Hence, ocean ranching will generally not increase the total biological production in the ecology. Therefore, inevitably, ocean ranching initiates an ecological adjustment process leading inter alia to changes (mostly reductions) in the stock levels of other marine species some of which may be commercially important. In this way, ocean ranching has a fundamental external impact on other fisheries and marine resource use in general.[8]

In addition to the ecological externality, a variety of other external effects may be associated with ocean ranching. Examples are the harvesting externality where outside fishermen catch the ranched fish and environmental externalities on the shoreline where the ocean ranching facilities operate. These externalities, however, are somewhat incidental. A given ocean ranching operation may or may not give rise to them. The ecological externality, by contrast, is an inevitable consequence of any ocean ranching operation. In this sense it is fundamental.

2.1 The Size, Direction and Implications of the Ecological Externality

It is first of all important to realize that the impact of the fundamental externality of ocean ranching ¾ the ecological externality ¾ may not be of a gradual nature. It has become widely recognized that ecologies are intricate systems generally featuring multiple equilibria and possibly strange dynamics and bifurcations (Li and Yorke, 1975; May and Oster, 1976; Walters, 1986). Moreover, there is little reason to expect ecological equilibria familiar from historical experience to be particularly stable with regard to the stress of increased ocean ranching. After all ocean ranching typically represents a new type of stress that the ecosystem has not had an evolutionary time to adjust to. Therefore, it is quite possible that ocean ranching, even on a relatively small scale, may effect a permanent ecological shift - a bifurcation or a catastrophe in the mathematical sense. This essentially means that the ocean ranching causes a shift in the ecology from the neighbourhood[9] of one equilibrium to the neighbourhood of another. The second equilibrium neighbourhood may or may not be more beneficial than the first one. The main point, however, is that both of these may be (locally) stable equilibria and it may be difficult to get back to the initial equilibrium neighbourhood, even by terminating the ocean ranching operation.

Due to ecological constraints, ocean ranching will generally not increase the overall production of protein in the ecology - at least not in the long run. This has a number of implications:

The external effects of ocean ranching imply that profits maximizing ocean ranchers operating within the market system will generally not receive the appropriate economic signals. Hence, if the externalities are negative, they will tend to do too much ocean ranching and vice versa. Public ocean ranching operations generally do not have to respond to market forces only. Consequently, in principle, they are in a position to select the socially optimal level of ocean ranching. For a range of well- known reasons, however, they cannot be expected to act in the socially optimal fashion either. Their conclusion therefore must be that there does not seem to be any social forces that guide the ocean ranching activity, irrespective to whether it is private or public, toward the common good. In fact, due to the fundamental ecological externality, the guidance provided by the market is generally toward a socially inappropriate level of ocean ranching.

2.2 Remedies

The above discussion makes it clear that ocean ranching operations generally tend to proceed in socially suboptimal ways. The fundamental cause of this is the ecological externality generated by the ocean ranching activity. The loss of economic benefits due to these externalities depends on the empirical situation but may easily be substantial. It is therefore of considerable importance to device mechanisms that induce private firms to act in a socially optimal manner.

There are two basic approaches to the economic problem of externalities. One initially proposed by Pigou (1912) is to counteract the externality by imposing corrective taxes or subsidies. Thus, if an ocean ranching activity produces a negative externality, a corrective tax would be imposed, e.g. on the number on releases. This would discourage the ocean ranching as required by social optimality. If the tax is correctly calculated, i.e. accurately reflecting the marginal external costs being imposed, the level of discouragement would be socially optimal. If the externality is positive, there would be a subsidy and the corresponding comments would apply.

This method of correcting for ocean ranching externalities is analytically elegant, intuitive and administratively relatively easy to implement. It therefore constitutes a viable option for social planners. We should not, however, close our eyes to certain practical difficulties with corrective taxes and subsidies as tools to achieve optimality. First, the informational requirements for calculating the optimal tax are immense. Basically, the taxing authority has to have at its command all the economic and biological data of the system at all times (Arnason, 1990). Clearly, in most cases, this is quite impossible. Hence, basically, the optimal corrective tax (or subsidy) cannot be calculated. Second, the optimal tax (or subsidy) generally changes over time in response to changing conditions. It must therefore be continuously recalculated. Third, the optimal tax (or subsidy) is generally not uniform across ocean ranching firms unless the firms are identical in all respects. Differential taxation across firms is, on the other hand, problematic from a socio-political point of view.

The other approach to the problem of externalities is to extend the system of private property rights to cover the resources affected by the externality. In this way, the externality comes subject to the market system or at least negotiations between the parties involved (Coase, 1960). Hence, provided there is adequate knowledge and the informational asymmetries are not excessive the distortionary impact of the externality may be greatly diminished or even eliminated.[13]

One method of introducing property rights in fisheries and other activities of marine extraction is to implement a system of individual transferable quotas (ITQs) for all species (Arnason, 1993).[14] In commercial fisheries these quotas would typically be positive (reflecting removal of fish from the ecology) and command a positive market price. In commercial ocean ranching, these quotas would be negative (reflecting the adding of fish to the ecology) and command a positive price if the ocean ranching produces overall negative externalities,[15] and a negative price (reflecting payments to the ocean rancher) if the ocean ranching produces overall positive externalities.[16]

Arnason (1993) showed that, provided the quota market works reasonably smoothly, if the vector of total allowable catches (TACs) for the various species in the ecology is adjusted so as to maximize the overall ITQ values the resulting TACs and ITQ prices will reflect the externalities involved to the extent that these externalities are noticed by the quota traders. The optimal combinations of TACs and ITQ prices will then be as listed in Table 2.1.

Table 2.1
TAC and ITQ prices: Polar Cases

Total Allowable Catch, TAC

ITQ price




Unprofitable stock enhancement

Unprofitable fishery (e.g. predator/competitor stock reduction)


Profitable stock enhancement (e.g. commercial ocean ranching)

Profitable fishery (commercial fishery)

Solving the ecological externality problem of ocean ranching with the help of ITQs appears more practical than corrective taxation. The ITQ method basically relies on the sum total of ecological knowledge held by the private sector. Under the ITQ system, this finds expression as net aggregate demand for ITQs in the market. This demand in combination with the overall TACs determine ITQ prices that in turn send economic signals as to the optimal behaviour to ocean ranchers and others utilizing the ecology. Provided the vector of TACs is socially optimal, the resulting ITQ price signals will be socially appropriate. Thus, the social management problem is transformed into the relatively simple one of adjusting the TACs so that the market value of ITQs is maximized. This maximization corresponds to the best overall feasible utilization of the marine ecology.

2.3 The International Aspect

All the economic externality problems of ocean ranching discussed above apply equally in the international context. One country’s ocean ranching may well impose ecological and other external economies (positive or negative) on other nations.[17]

The ocean ranching externality problem in the international context may be very difficult to solve. Clearly, corrective taxes or property rights imposed by one national authority do not solve the problem. Bilateral or, as the case may be, multilateral agreements are needed. Unfortunately, current agreements on the Law of the Sea[18] do not appear to contain adequate provisions to deal with this problem.

[8] This is discussed in more detail in Arnason, 1991.
[9] Since ecologies are generally not in equilibrium it is more accurate to talk in terms of neighbourhoods of equilibria.
[10] See Suda, 1991.
[11] It is, of course, conceivable, albeit “unlikely”, that only the biomass growth of “useless” species will be reduced and that of all “useful” species either unaffected or enhanced.
[12] The harvesting externality mentioned above will tend to counteract the ecological externality. Certain other externalities associated with ocean ranching also mentioned above will tend to reinforce it.
[13] Transaction costs are an often quoted reason for a Coasian type optimal solution not to be reached. It should be noted, however, that transaction costs are real (although possibly man made) so their existence may render an otherwise socially non-optimal solution optimal.
[14] The multi-species ITQs should represent shares in the TAC and be permanent (Arnason, 1990).
[15] As for instance would tend to be the case for pure ocean ranching.
[16] As would tend to be the case for stock enhancement ocean ranching.
[17] It may be noted that the ecological externality problem of ocean ranching in the international context is really the flip side of the migratory fish stocks and high seas fishing problem in traditional fisheries.
[18] The Law of the Sea Convention (1982) and the UN Agreement on Straddling and Highly Migratory Fish Stocks (1995).

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