2. CAUSES AND CONSEQUENCES OF OVERCAPACITY

While excess capacity is often most apparent in a fishery as it is easiest to identify, the fundamental issue for capacity management involves overcapacity. Excess capacity may be an indicator of overcapacity, or may exist for other reasons. In some cases, for example when strict effort controls are imposed on a temporary basis to allow stocks to recover, excess capacity may be a necessary by-product of effective management. In contrast, overcapacity is a persistent problem that, unless addressed, will result in failure to achieve the objectives of management and an inefficient use of the fishery resource.

As illustrated in the previous section, overcapacity develops primarily as a consequence of market imperfections. In the case of the fishery, a major market imperfection is the absence of clearly defined property rights and the incentives this creates. Overcapacity in fisheries leads to several problems, including:

• overinvestment in capital and the excessive employment of labour in the harvesting industry with impact on processing in some cases;

• depleted abundance for both the directed fishery and associated fish stocks; overfishing and, potentially, denigration of habitat;

• reduced returns to capital and labour, and a decline in the quality of life of fishers and their families; and

• increasing political strife in the management process.

In addition, realignment of the management strategy and objective becomes increasingly difficult as the severity of its consequences increase over time. The greater the adjustment necessary to bring capacity into line with the resource, the greater the impact of the change and, consequently, the greater the resistance to change.

In this section, the factors causing the development of overcapacity and the consequences of this development are further detailed.

2.1 The link between markets and capacity

A theoretical construct that describes a market that allocates goods and services perfectly is called the perfectly competitive market. Such a market is characterized by price-taking producers and consumers, homogeneous products, the existence of complete and perfect knowledge, and free mobility of resources (Ferguson and Gould, 1975). When these conditions are met at the long-term market equilibrium, each unit of output is produced at the lowest possible cost and sells for a price that allows “normal” profits to be earned by the producer. These “normal” profits represent the rate of return on the investment that is expected given the returns that could be earned in alternative investments with similar levels of risk. They are also the minimum returns necessary to keep the producer in the industry. With perfectly competitive markets, investment flows into industries that are earning profits above their “normal” level, and flows out of industries that are experiencing less than “normal” profits. It is when these perfect market conditions are not met at the long-term market equilibrium that undercapacity or overcapacity can exist in the marketplace. This is known as market failure.

The assumption that the perfectly competitive marketplace consists of price-taking producers and consumers means that the buying or selling behavior of an individual entity does not affect the market price of a good or service. This condition can be met in a marketplace characterized by such a large number of consumers and producers that their individual shares of the total market are so small that any individual decision to buy or sell cannot raise or lower prices.

Alternatively, the product being produced could have such a large number of substitute products available that even a single producer could not influence the price paid by consumers by increasing or reducing output levels. Whether or not there are large or small numbers of producers and consumers, or if in aggregate their decisions do affect price levels, this assumption for a perfectly competitive market to exist requires that individual entities act as if prices are given in the marketplace.

The assumption that the perfectly competitive marketplace consists of homogeneous products means that the product of any one producer is identical to the products produced by all the other producers. This assumption means that consumers are indifferent to the firm from which they purchase the good or service. That is, real or perceived differences in the quality of a good or service do not create price differentials that consumers are willing to pay for.

The assumption that complete and perfect knowledge exists in the perfectly competitive marketplace ensures that a uniform price exists for inputs and outputs. Without perfect knowledge consumers might pay a higher price for when a lower price is available, labourers might not sell their services to the highest bidder, or producers may not sell their goods at a price that maximizes their profits from production. This assumption also requires perfect knowledge about the future as well as the present. For example, the discovery and exploitation of a new oil reserve would increase the supply of oil on the world market thereby depressing its market price. Without perfect knowledge of the resource base, consumers of oil would overpay prior to the discovery of the new field and the price would not reflect future conditions in the marketplace.

Related to the above is the assumption that all inputs have a price that relates to the marginal value of the input (i.e. the additional value of output given the use of an additional unit of the input). Price is essentially a mechanism for allocating inputs to their most productive use. If the price is incorrect, then the input is either overused if the price is too low, or not used enough if the price is too high. This is particularly relevant for fisheries, as will be discussed below, as a key input into the production process - access to the fish stock - has a zero price.

Of importance also for this discussion is the assumption of free mobility of resources for the existence of perfectly competitive markets. This condition assumes that all resources can move to their best use or highest bidder. That is, each resource can easily move into or out of the marketplace in response to their price signals. Labour, which is assumed to be of uniform quality and skill levels, can move between employment opportunities geographically with no retraining. Also, inputs in the production process are not monopolized by an owner or by a producer. In addition, firms or capital investment can enter or leave the marketplace without difficulty (i.e. capital is malleable).

Freely mobile does not mean that costs do not exist. Individuals cannot become farmers without paying a fair price for the land on which they grow their crops or the acquisition of new skills.

Freely mobile does mean that existing firms can withhold production or new firms can begin production by purchasing the land, labour and capital needed to enter the industry. One requirement underlying the free mobility of resources condition is the existence of clearly defined and enforceable individual property rights for goods and services. Without strong property rights, resources cannot be transferred between economic entities.

If these conditions hold at the long-term equilibrium (and when economic efficiency means that profits will be maximized by individual entities as well as for the marketplace as a whole), the marketplace will allocate inputs and outputs efficiently. In the long term, all inputs and outputs are variable and can be adjusted by economic agents to their best use, which means use by the highest bidder for that resource.

These conditions can still hold in the short term, where one or more inputs or outputs are fixed and cannot be adjusted to their best use or use by the highest bidder, but profits will not be maximized. As a result of this fixed input or output in the short term, insufficient or excess capacity can exist in the market. In the long term, the fixed input or output is variable. The economic agent or entity can adjust its use of inputs or production of outputs to maximize profits at both the individual and aggregate levels in the market.

2.1.1 The link between markets and excess capacity

In general, excess capacity may be defined as the difference between what a production facility could produce if fully utilized and what is actually produced by the owners, given the prices of inputs and outputs. Excess capacity is a common phenomenon in all types of industries at different points in time.

For example, a tilapia farm would be constructed by its owners to produce a level of output that, given the price of tilapia, would maximize the owners’ revenue while minimizing operating costs, given the price of feed, tilapia fry, electricity, labour, and any other inputs used in the production process. If the cost of feed increased over time, the farmer would respond by reducing production because operating costs usually decline faster than revenues when production drops. While the lower level of production is efficient given the prevailing input prices, profits are lower as a consequence of the cost of maintaining the fixed assets (e.g. the tanks). The farm is producing less than it is technically capable of producing (i.e. excess capacity exists).

In the long term, the fish farmer will increase their profits for this new level of output by replacing the tanks with either smaller, or fewer tanks, resulting in lower fixed costs and hence lower production costs. Excess capacity will not exist given this new structure. Thus, in this case, excess capacity is considered to be a short-term problem that is self-correcting because of the financial incentives that the market creates for owners of the firm.

In marine capture fisheries, market induced excess capacity would also be expected to be self-correcting over time, assuming the change in market conditions persisted (and were expected to continue to persist). Indeed, as will be discussed in detail later, increasing the cost of fishing has been proposed as one solution to the problem of overcapacity. However, as discussed earlier, not all excess capacity is a direct result of changes in market conditions. For example, excess capacity can result from restrictions on season length. In such cases, purchasing a smaller vessel would be of no benefit, as the season length is beyond the control of the fisher. Instead, the incentive is to purchase a larger vessel so that catch can be increased over the limited season. In such cases, the excess capacity is indicative of overcapacity, while the incentives developed as a result of the management policy are likely to lead to increased overcapacity.

Most marine capture fisheries management plans are based on attempting to control the symptoms of market failure without addressing the real cause of the market failure (i.e. no price for the fish resource). Failure to address this underlying problem has contributed to the expansion of capacity and generation of overcapacity in many fisheries. Indeed, some measures, such as subsidies, have actively encouraged the generation of overcapacity in world fisheries. Other measures, while well intended, have often not achieved the desired results due to the underlying market failure.

2.1.2 The link between markets and overcapacity

Overcapacity can exist in a market if one of the perfectly competitive market conditions is violated at the long-term market equilibrium. The market fails to allocate resources efficiently since individual or industry profits are not maximized.

Open access fisheries have become known as the classic example of market failure as the full costs of production are not realized by the producer (i.e. the stock input is unpriced leading to its overuse). Without strong property rights for the in situ resource, the market mis-allocates capital, labour, and the fish stock in the production decisions of the fishers, and profits are not maximized by the industry. Instead, effort continues to increase as new fishers enter the fishery until “normal” profits are realized (that is, the level of profits is equivalent to what might be earned elsewhere in the economy, representing the “opportunity cost” of the investment).

In any other industry, the fact that producers were earning “normal” returns would be considered as an indication that the market was working efficiently in allocating resources. However, in all other industries, all inputs are priced at a level that represents their value in production. As mentioned above, in the cases of fisheries, a key input - the fish stock - is unpriced. Hence, its use (or overuse) is not considered in the production process, and the “normal” profits produced by the fishers do not account for the value of the resource consumed in the production process.

The value of the resource in the production process is the resource rent. In other natural resource based industries, this rent is usually extracted by the resource owner, so forms part of the production decision. For example, in agriculture, tenant farmers pay rent to the landowner. Even when purchasing land, the value of the land reflects its future productive value (equivalent to the future discounted resource rent), and this is paid by the new owner to the previous owner. In forestry, usually royalties or fees are paid for the right to extract timber.

The above-normal profits generated by fishers at the start of an open access fishery is, in fact, the resource rent. This rent is being captured by the users of the resource (rather than the owners of the resource). It is this resource rent that attracts new entrants to the fishery, and it is this resource rent that is dissipated through the use of excessive levels of inputs. Hence, not only are yields lower than might otherwise be achieved, a valuable potential source of revenue to society (the effective owners of the resource) is lost through the additional costs (capital, labour, fuel etc) associated with overcapacity.^[10]

2.2 Consequences of overcapacity

2.2.1 Bio-economic consequences of overcapacity

The increase in fish harvesting capacity outlined in the previous section manifests itself as a substantial increase in fishing effort in the fishery. This increase in fishing effort results in a reduction in stock size below that necessary to support MSY in the fishery, eventually reducing yield to levels that are below MSY, and resulting in overfishing of the living marine resource. Such high effort levels can cause reductions in fish stocks to levels where they are threatened with extinction. This is particularly the case if technical advances offset the effects of reduced stock size in the production process, so that it is still profitable to harvest species at very low stock levels.

Increased incidental catch (i.e. bycatch) of non-target species and habitat destruction directly results from excessive fishing effort levels that can develop in fisheries characterized by overcapacity. In many parts of the world, there are now threatened or endangered species whose recovery is jeopardized by their incidental catch in commercial fishing operations (e.g. marine sea turtles). Excessive use of fishing gear in sensitive ecological areas can also reduce the carrying capacity of the environment for fish species. Lost gear can continue to deplete fishery resources through “ghost” fishing and reduce the viability of the entire ecosystem.

The above problems stem from overfishing that arises as a consequence of overcapacity. To some extent, these problems can be reduced by imposing measures that reduce capacity utilization, such as days at sea restrictions that limit fishing effort or quotas that limit the total catch. These measures, however, come at the cost of reduced efficiency in the fishery. For example, in the Adriatic, numerous regulations on fishing activity have been imposed to counter the problem of too much capacity and too much effort, resulting in a rather old and non-dynamic fleet. In addition to imposing considerable economic inefficiencies in the fishery, these measures are usually not completely effective. Where possible, fishers attempt to sidestep these regulations through the increased use of unregulated inputs. Usually, this results in more and more regulations being imposed, further reducing the ability of the fleet to adapt to changing conditions and, thereby, further reducing the efficiency of the fleet.

The reduced profitability in the fishery as a result of overcapacity can also results in some of the overcapacity diverting to adjacent unregulated fisheries. The overcapacity problem tends to move and grow up to a point where most fisheries in an Exclusive Economic Zone (EEZ) and around the EEZ are overfished and over capitalized. For example, overcapacity in the Senegalese EEZ, and the consequent reduction in performance, resulted in fishers moving into the neighbouring EEZs of Mauritania, Guinea-Bissau and Guinea.

2.2.2 Social and political consequences

Another problem with open access management is its impact on fishing-dependent communities. Incomes in many remote, fishing-dependent communities are tied directly to the abundance of fish stocks in the fisheries. Declines in stock abundance as a result of overfishing and overcapacity, and consequently fishing income, will have an impact not only on the fishers themselves, but other sectors in the local economy that service the industry directly (e.g. fuel suppliers, boatyards) or indirectly (e.g. local stores the provide consumer goods to the fishers and their families).

While the impacts on the local economy are a direct result of localized overfishing, these impacts are also an indirect consequence by the national or regional level of overcapacity. As noted above, overcapacity in one area can lead to fishing capacity diverting to less exploited areas.

While the state of these local economies may be depressed as a result of overcapacity, reducing overcapacity may also have adverse impacts. Reducing boat numbers will reduce the number of fishers employed. Although the incomes of the remaining fishers may increase, partially offsetting the lost income of the fishers who left, the lack of alternative employment opportunities may result in social problems developing in the local communities. Displaced fishers may be forced to leave the area, and the remaining fishing population may not be sufficient to maintain the level of economic activity previously in the community. For example, schools may be forced to close as a consequence of the reduced numbers of school children and banks, post offices, hospitals and other social services may be forced to centralize. These changes will cause further declines in the local economy, pushing it further into depression.

It could be argued that these facilities only existed as a result of the unregulated fishing activity, and if property rights had been established initially in the fisheries they may never have developed. However, the fact that they do exist and are affected by reduced overcapacity can cause general reluctance to instigate capacity reduction programmes. This reluctance will largely result in the decision to reduce overcapacity becoming a political issue rather than just a fisheries management issue.

While political strife may develop as a result of attempting to redress the overcapacity problem, political strife in the management process can also develop as a direct consequence of overcapacity in a fishery. As fishery resources become increasingly depleted or as total allowable catch is reduced by management regulations to aid in stock rebuilding, recreational and commercial fishers may become increasingly vocal in the management process.

Depending upon the management institution in place in a particular country, political pressure to increase yields from a fishery could outweigh the biological advice to reduce harvest levels to rebuild stocks. In addition, the temptation to violate fishery regulations also increases as stocks recover when excess and overcapacity exist. Since profits or satisfaction from fishing could increase by more than the expected cost of the fine, fishers have an incentive to cheat and land more fish out of season.