ICES Journal of Marine Science, 59: 649.
2002
doi:10.1006/jmsc.2002.1299, available online at http://www.idealibrary.com on
Food for Thought
ITQs and the economics of high-grading
Michael C. S. Kingsley
Kingsley, M. C. S. 2002. ITQs and the economics of high-grading. – ICES Journal of
Marine Science, 59: 649.
Received 11 June 2001; accepted 11 December 2001.
Michael C. S. Kingsley: Greenland Institute of Natural Resources Nuuk, Greenland
[e-mail: mcs@natur.gl]
Individual Transferable Quota (ITQ) are now used as a
management tool in many fisheries. ITQ permit an indi-
vidual the freedom to allocate resources so as to maximize
net return within an individual constraint on catch. The
constraint imposed by a collective TAC is an expected
duration of fishing opportunity, and the incentive that
results is to conserve time; under this constraint, resources
would be differently, and perhaps less efficiently, allo-
cated. However, as ITQ impose instead an incentive to
conserve quota units they might be expected to increase
the reward from discarding low-value catches.
Making quota freely negotiable, so they can be
bought and sold at a price agreed between buyer and
seller, gives an additional dimension of freedom and
flexibility to the fishing community. However, I was
recently astonished to be confidently assured by two
experienced fishery scientists that this further step is
detrimental in that it hugely increases the fisherman’s
incentive to high-grade.
The argument advanced to support this view was as
follows: suppose the price paid for quota was $10 kg
1.
Effective return must be calculated on marginal profit,
and so if small fish are worth $12 kg
1 and large $18
kg
1, the marginal profits are $2 kg
1 and $8 kg
1: large
fish are worth four times as much as small. Hence, the
incentive to high-grade is powerful and will increase as the
profit margin on small fish decreases. If small fish become
worth less than the price paid for the quota, the incentive
to high-grade becomes a compulsion: one would be losing
money by selling fish at such a price. This argument is
fallacious, according to the following analysis:
A fisher has caught 1 t of small fish, and must decide
whether to discard it, in the hope of replacing it with
more valuable large fish, or land it at the going price.
The quota cost $Q t
1, small fish at the dock are worth
$S t
1, and large fish are worth $L t
1. Discarding
incurs a cost of $D t
1. If the present catch is discarded,
it will take an estimated H hrs of fishing, at a cost of $F
hr
1, to replace it with another tonne; the chance of
1054–3139/02/080649+01 $30.00/0  2002 International Council for the Exploration of the Sea. Published by Elsevier Science Ltd. All rights reserved.
getting big fish is b, and (1-b) of getting another catch of
small fish. The net return on quota used up after
catching a replacement tonne of fish is therefore the
expected value of sales minus the expected costs:
bL + (1-b)S
D
HF
Q
But a decision to land the small fish already in the hold
incurs no discard cost and no extra fishing cost, and the
net return therefore becomes:
S
Q
Therefore the marginal interest in discarding is:
b(L-S)
(D+HF).
The first term in this expression is the expected return
from high-grading, the second is the expected cost of
doing so. Thus, the incentive for high-grading depends
on the probability of replacing small fish with large, the
price differential, the cost of discarding, and the cost of
the necessary extra fishing; but not on the price paid for
the quota (Q). This is merely an expression of the
economic truism that the amount of a sunk cost does not
affect the relative benefits of future courses of action.
According to this simple model, negotiable ITQ do
not increase the marginal benefit of high-grading catch.
This is not to say that ITQ do not give an incentive to
high-grade catches; merely that this incentive does not
depend on the negotiability or cost of quota.
In practice, people act on their beliefs, which may be
erroneous. The fallacious reasoning described earlier is
simple and compelling, and if fishers believe that having
paid so much for their quota gives them an overriding
reason for high-grading catches, they may do so. However,
the effects are not necessarily beneficial either to the fish-
able resource or to their own bank accounts. This problem
could be easily addressed by distributing correct infor-
mation; but is only aggravated if fishery scientists continue
to propagate a fallacy by depreciating the principle of
negotiable ITQ.