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.
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.
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 |
||
|
Total Allowable Catch, TAC |
|
ITQ price |
Negative |
Positive |
Negative |
Unprofitable stock enhancement |
Unprofitable fishery (e.g. predator/competitor stock
reduction) |
Positive |
Profitable stock enhancement (e.g. commercial ocean
ranching) |
Profitable fishery (commercial fishery) |
All the economic externality problems of ocean ranching discussed above apply equally in the international context. One countrys 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.