ARTICLE IN PRESS

Marine Policy 32 (2008) 920–927

www.elsevier.com/locate/marpol

Fisher’s behaviour with individual vessel quotas—

Over-capacity and potential rent
Five case studies
Frank Aschea,, Håkan Eggertb, Eyjolfur Gudmundssonc, Ayoe Hoffd, Sean Pascoee
a
University of Stavanger, N-4036, Stavanger, Norway
b
Gothenburg University, Sweden
c
University of Akureyri, Iceland
d
Food and Economics Institute, Copenhagen University, Denmark
e
CSIRO Marine and Atmospheric Research, Australia
Received 17 December 2007; received in revised form 20 January 2008; accepted 21 January 2008

Abstract

Internationally, individual vessel quotas (IVQ) have become an increasingly popular management tool. The main attraction of IVQs is
the incentives they create for cost savings, autonomous capacity adjustment and, subsequently, rent generation. In this paper, the extent
to which different IVQ systems have facilitated resource rent generation and capacity adjustment in five European countries—Denmark,
Iceland, Norway, Sweden and the UK—is examined. The potential economic rents and the capacity reduction necessary to achieve these
rents in each of the fisheries are also estimated. Reasons why IVQs have not achieved their potential economic benefits in these fisheries
are also examined.
r 2008 Elsevier Ltd. All rights reserved.

Keywords: Fisheries management; Resource rent; Over-capacity; Individual vessel quotas; Incentives

1. Introduction
The need for management of marine fisheries to prevent
overexploitation of our fish resources is well established [1].
With good management, fish stocks have the potential to
generate substantial economic benefits in the form of
resource rent. However, without effective management,
resource rent acts as pure economic profits for the fishers,
and the fishery will attract excess capacity until this
resource rent is fully dissipated.1 As an additional
consequence, in an unregulated or open access fishery,
Corresponding author. Tel.: +47 51 83 22 86; fax: +47 51 83 17 50.
E-mail addresses: Frank.Asche@uis.no (F. Asche),
Hakan.Eggert@economics.gu.se (H. Eggert), Eyjolfur@unak.is
(E. Gudmundsson), ah@foi.dk (A. Hoff), sean.pascoe@csiro.au
(S. Pascoe).
1
Economic profits are profits over and above what might be considered
normal profits, and are known also as excess profits or above-normal
profits. For a homogeneous fleet, economic profits are equivalent to
resource rent. In a heterogeneous fleet, some of the economic profits
the fish stocks will be at a lower level than what is both
biologically and economically optimal. Hence, without
management, fish stocks are effectively a common pool
resource, and are thereby subject to the tragedy of the
commons [3].
Since the 1950s, some form of regulation has been
introduced into most fisheries to limit either catch or
fishing effort, the latter usually being based on some
implicit catch target. With a correctly set total allowable
catch (TAC), fish stocks can be prevented from being
biologically over-fished. However, economists soon rea-
lised that a TAC did nothing to solve the economic
problem in fisheries management. TACs, and most other
regulations that have been used to limit fishing effort, do
not change the economic incentives facing the fishers.
Instead, incentives are created for fishers to maximise their
(footnote continued)
represents intra-marginal rents, or returns to skipper skill and manage-
ment [2].

0308-597X/$ - see front matter r 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.marpol.2008.01.007
 ARTICLE IN PRESS
F. Asche et al. / Marine Policy 32 (2008) 920–927
share of the catch, which leads to over-capacity in the
harvesting sector as fishers increase their use of unregulated
inputs [4]. Furthermore, compared to an unregulated
fishery, these regulations may make the overcapacity
problem even more severe because of the incentives created
to race to fish [5]. What is more, since the common
property nature of the resource is essentially unaltered by
these regulations, the resource rents are still in most cases
fully dissipated.
Since the early 1990s, incentive-based systems have
become increasingly attractive as alternative fisheries
management tools, and have proved successful in improv-
ing both economic and ecological sustainability [6]. One
such system involves allocation of individual catch alloca-
tions, which may or may not be transferable. These
individual vessel quotas (IVQs) have become an important
management tool [7]. For these schemes, each participant
in the fishery is entitled to a quantity or quota share of the
TAC. This eliminates competition for the quota as fishers
are ensured of their quota share. Moreover, it changes the
fishers’ incentives to maximise their profit given their
quota, and rent generation becomes possible.
Rent generation when the race to fish is eliminated has at
least two causes. The most obvious is that harvesting costs
are reduced as competition for the catch is stopped. The
second is that revenues are increased since fishers with
better control of their harvests can target different markets.
That is, incentives are created to improve the value of their
catch as the quantity is limited. However, while individual
quotas hold the potential to generate rent, it is not a sure
outcome. To ensure rent generation due to lower costs,
capacity in the fishery cannot be too high. This is a
problem, as there tends to be substantial overcapacity in
fisheries when IVQ are introduced. In most cases, the
practice has been to initially allocate quota shares to fishers
gratis, usually based on historical catch records.
Transferability of individual quotas provides incentives
for efficient harvesters to acquire quota from less efficient
harvesters leading to a reduction in harvesting capacity.
This will improve overall harvesting efficiency in the fishery
and generate rent. In principle, a well-designed individual
transferable quota (ITQ) system will allow resource rents
to be generated through a reduction in excess capacity
arising from quota trading, although there is also evidence
that this is a long-run process that may take substantial
time [8].
An interesting question is which aspect is the most
important in generating rent in IVQ schemes. Is it the
change in incentives to reduce costs and increase value due
to the individual quotas or is it the capacity reduction due
to the transferability of the quotas? This question has great
practical implications as several countries have chosen IVQ
schemes that do not allow or have put in place strict limits
on transferability of quota. These issues are well under-
stood in theory [4,9]. However, few studies have actually
measured their magnitude, and it is accordingly difficult to
assess their real importance.
921
TC3
TC2
TR, TC
a
TC1
b
d
c
TR
X∞ XMEY Biomass
Fig. 1. Regulated open access and rent.
In the European Economic Area, there are several
examples of different hybrids of individual quota schemes.
This ranges from full ITQ systems in Iceland to systems
with limited or no transferability in Denmark, Norway,
Sweden and the United Kingdom. These differences in the
application of the management method provide an
opportunity to examine the importance of capacity
reduction to rent generation in fisheries managed under
IVQs.
The main objective of this paper is to investigate how
these different individual quota systems have performed
focusing on two key issues; (i) to what extent have they
enabled resource rent to be generated and (ii) how much
overcapacity remains in the fishery. The results from
country studies in Denmark, Iceland, Norway, Sweden
and the UK are compared. All the fisheries investigated
have some form of individual quota systems in place, but
the regulatory systems have substantial differences.
2. Modelling an IVQ fishery
The basic issues in a fishery management problem as
addressed by Gordon [1] can be described using the
standard Gordon–Schaefer model. This is illustrated in
Fig. 1 in the version with biomass on the horizontal axis.2
Biomass, X, is stock size and TC1 is the standard cost
function with constant average cost per unit effort. The
points of interest are the tangent of the cost function to the
total revenue (TR) function (point a) and the intersection
of TC1 with total revenue (point b). At the maximum
economic yield (XMEY), price equals marginal harvesting
cost and generates maximum resource rent (the distance
a–c). However, this acts as pure profits for the fishers.
Above-normal profits in the fishery create an incentive for
additional investment to be made, and the stock is fished
down to the point where total revenue equals total cost
(point b), at which no excess profits are generated and,
accordingly, all economic rents are dissipated. This is the
2
Different expositions of the model are discussed in Ref. [4].
 ARTICLE IN PRESS
922 F. Asche et al. / Marine Policy 32 (2008) 920–927
open access equilibrium and the standard result of fisheries
economics [1].
In a regulated open access fishery, the harvest is
restricted with a TAC and the length of the fishing season
is restricted in order to achieve the desired TAC. Access to
the resource during the open season, however, is effectively
unlimited. If this regulation is successful, stock size will be
larger than under unregulated open access. Let it be
assumed that regulators have managed the stock (biologi-
cally) well so that it corresponds to XMEY. However, under
regulated open access, rents will in general still be
dissipated at this point because of the extra effort and
capacity. In fact, regulated open access reinforces the
problem of overcapacity and a ‘‘successful’’ regulated open
access regime leads to substantially greater overcapacity
than the standard open access regime [5]. This is because
the increased stock results in higher revenue and short-term
economic profits, which continue to attract investment.
Given the restrictions on the fishery, investment is in areas
such as bigger or faster boats, increasing the cost of fishing
and shifting the cost function to TC2. A new equilibrium is
achieved when the total cost is equal to total revenue and
no excess profits are generated (point a). All rents are
dissipated, and the economic waste, from a social point of
view, is even greater in the regulated open access than in
the open access equilibrium because of the increase in
redundant capacity.
If the race to fish is removed with the introduction of
individual quotas, a cost function such as TC3 will be
observed as incentives exist to reduce cost per unit of
output. The distance a–d is the rent generated by the IVQ
system. The distance d–c is the rent that is still dissipated
due to overcapacity under the system. However, if capacity
is adjusted to optimal levels, costs will be reduced to TC1
and all rents will be captured (the distance a–c). Conse-
quently, with an IVQ management scheme, at stock level
XMEY, the difference between TC2 and TC3 (the distance
a–d) is the rent that is captured by stopping the race to fish,
while the difference c–d is the rent that is captured by a
reduction in capacity to optimal levels.3
When modelling the harvesting process, an assumption
of profit maximisation is often the starting point and
production parameters can be estimated using a profit
function specification. Observed profits are often taken as
an estimate of realised rent in a fishery [10]. With IVQ, the
harvest level is an exogenous or restricted factor. At the
individual level, output process can also be considered
exogenous as fishers are generally price takers. The
optimisation problem therefore becomes to maximise
profits for a given catch level (quota) or equivalently, to
minimise the cost of harvesting the given quota.The total
3
Note that in Fig. 1, the long-run steady state is assumed. If an IVQ
regulation is introduced for a regulated open access fishery, starting at
stock level XN, stock recovery (moving to the right) facilitates increased
rents. Moreover, some stock recovery from the open access level is
necessary for any rents to be generated.
Cost per unit output
Marginal cost
(∂C/∂Y)
AC*
Average cost
(C/Y)
Y* Output, Y
Fig. 2. Optimal level of output and minimum average cost per unit of
output.
profit function for a fisher under an IVQ scheme can be
written as
Pðp; wÞ ¼ Yp  Cðw; Y Þ, (1)
where p is the price of fish, Y is the harvest level, w is the
input factor prices and C(w; Y) represents the cost function
where the individual fisher decides the mix of input
quantities for a given quota (e.g. how much fuel, capital
and labour to use in taking their catch). The cost function
contains all the choice variables for the fisher under an IVQ
scheme. Moreover, the observed levels of these variables
provide information about fisher behaviour.
The model given by Eq. (1) can also be used to estimate
the optimal output level by finding the cost minimising
level of output [11]. This is the point at which the marginal
cost (qCðw; Y Þ=qY ) is equal to the average cost (C(w; Y)/
Y), as illustrated in Fig. 2. At this point, the optimal
harvest level, Y*, is produced at the lowest average cost per
unit of output, AC*.
Furthermore, given the TAC, and assuming that the
data set is representative, the number of vessels necessary
to take the TAC can be estimated by dividing the TAC by
the optimal harvest level. This effectively assumes a
homogenous fleet all operating at the optimal level of
output, and is a measure of the optimal fleet size. The total
economic profits of these vessels will then be the potential
resource rent in the fishery given the observed type of
vessels.4 This is important information in fisheries managed
with IVQs, as it will provide estimates of the extent to
which one has been able to realise the resource rent and
how much resource rent is dissipated due to too many
vessels or overcapacity in the fishery.
4
As the optimal fleet size and configuration also imply a homogeneous
fleet, any estimated economic profits can be considered as resource rent [2].
 ARTICLE IN PRESS
F. Asche et al. / Marine Policy 32 (2008) 920–927
3. Case studies
In this section, a brief overview is given of the analyses
undertaken for the five case study fleets that are examined.
In all cases, the fisheries examined were multispecies
fisheries with cod as the main species. The fleets in
question, however, differed substantially. The Icelandic
and Norwegian studies deal with fisheries employing large
trawlers, while the vessels are much smaller in the other
three cases. In four cases, the catch composition consisted
of species with a well-integrated market [12]. Hence, the
species were aggregated into a single output for the
purposes of the analysis. In the Danish case, a multispecies
framework was necessary.
In all cases, cost functions were estimated from economic
data collected through costs and earnings surveys, as
well as logbook and vessel registry data. The estimated
cost functions were then used to calculate the potential
resource rent in order to measure the relative efficiency
of the fisheries management in each country. However, as
the regulations and fisheries in the different cases are
different, the specifications could not be identical. For
more details on each case, the interested reader is referred
to the individual studies by Asche et al. [13], Eggert and
Tveterås [14], Gudmundsson [15], Hoff and Frost [16], and
Pascoe [17].
3.1. Norway
The Norwegian case study fishery involved large cod
trawlers. This fleet has been operating under an IVQ
system since the mid-1990s, with a limited degree of
transferability. The trawlers mainly target cod, but other
whitefish species are also important. The economic data
used in the analysis covered the period 1997–1999 (annual
data), with a total sample size of 98 observations. The data
were provided by the Norwegian Directorate of Fisheries.
A cost function was estimated for these vessels with
labour, capital and operations costs as inputs. The system
R2 was 0.976, indicating that the model explained a high
degree of the variation in costs. From the model, the
optimal level of landings at the prevailing average prices
was found to be 6296 tonnes, almost three times the
average quantity actually landed in the fleet (Table 1).
However, the most powerful vessels land close to this
Table 1
Observed and potential rents, Norwegian trawlers, average per vessel
Observed Potential
Tonnes h’000 h/kg Tonnes h’000 h/kg
Harvest level 2249 6296
Revenue 2208.8 0.98 6174.6 0.98
Costs 2422.1 1.08 2510.0 0.40
Economic profit 213.4 0.10 3664.6 0.58
923
quantity in years with large quotas,5 so the optimal catch
level is not unrealistic.
Over the period examined, the actual level of economic
profit was found to be negative on average (Table 1). Many
of the vessels in the sample were old (on average, boats
were constructed in 1976), and most of them received
subsidies when they were acquired. As a result, financial
profits may have been positive even though economic
profits (which also consider the opportunity cost of the
capital) were found to be negative. Ending the race to fish
through the use of IVQs, therefore, was not sufficient to
allow rent to be generated.
In contrast, the potential revenue and rent at the optimal
catch level were both substantially higher than current
levels, with potential rent being roughly 60% of total
revenue. If all boats operated at the optimal level, 64.4% or
almost two thirds of the vessels were redundant given the
prevailing TACs. This suggests that overcapacity was a
major problem, and most likely accounted for the lack of
rent being generated in the fishery.
3.2. Iceland
Icelandic vessels operate under an ITQ system with
relatively minor restrictions on transferability. Foremost of
these is a limit on the total quota share that can be owned
by any one company (e.g. 12% of the quota share for cod
and 20% for haddock).
The analysis was limited to the large (over 800 GT)
freezer and wetfish trawler fleet with data provided mainly
by four government agencies: the Marine Research
Institute, Fisheries Directorate, Icelandic Maritime Admin-
istration and Statistics Iceland. The data included catch,
effort, vessel characteristics and costs and earnings of
fishing over the period 1995–2000. The cost and earnings
data related to companies rather than individual vessels
within companies, so data were aggregated to the company
rather than individual vessel level. After combining the
usable data from the four different sources above, the final
dataset had 157 observations.
A translog cost function was estimated and the model was
found to have a relatively good fit (R2 ¼ 0.94). The optimal
firm size was estimated to be about 26 times larger than the
average firm size, or with an annual harvest of 120,000 metric
tonnes. The maximum annual harvest per large trawler was
about 8000 metric tonnes over the period examined. This
number can of course change due to environmental factors,
labour laws and labour contracts. Given that optimal firm
size was 120,000 metric tonnes and that the average annual
catch by the trawler fleet for the period in question was about
225,000 metric tonnes of groundfish species, there would
only be room for two companies operating a mixed fleet of
freezer and wetfish trawlers.
5
Moreover, the regulatory system also discriminates against the larger
vessels in that, relatively to size and harvest capacity, they get a lower
quota than smaller vessels.
 ARTICLE IN PRESS
924 F. Asche et al. / Marine Policy 32 (2008) 920–927

These numbers are rather extreme, and the estimated

optimal firm size falls outside of the original sample (i.e. no
firm was observed to be that large in the period examined).
Further, the optimal firm size was beyond the current limit
on quota ownership. One implication of this is that the
Icelandic fisheries may become more efficient if the
restrictions on ownership of quota shares were lifted.
Given that the maximum catch of each vessel is around
8000 metric tonnes, then the trawler fleet could have been
reduced from the 69 vessels down to about 30 or 40 vessels,
or up to a 50% reduction.
Using the estimated model and the average landing value
from 1995 through 2000, the potential and realised rents
can be calculated (Table 2). Based on the cost and earnings
data, the actual average level of economic rent accruing to
the vessel over the period examined was found to be about
7% of the average revenue (Table 2). With an optimally
sized company, cost savings accrue fully to the company
owners as resource rent, which was estimated to increase to
around 50% of revenue. The restriction on quota owner- Fig. 3. Derived average and marginal cost curves, Swedish trawlers, 2001.
ship (i.e. limits in the amount of quota that can be owned) Optimal catch ¼ 660 tonnes.
prevents such amalgamations, thereby preventing the full
potential resource rent generation. Table 3
Observed and potential rents, Swedish vessels, average per vessel
3.3. Sweden Observed Potential

The Swedish study focused on small trawlers. The Tonnes h’000 h/kg Tonnes h’000 h/kg
trawlers targeted cod as their main species and operated Harvest level 141 660
under an individual vessel quota system. Quota was Revenue 256.2 1.82 1199.4 1.82
allocated on a weekly basis and was not transferable. The Costs 273.3 1.92 887.9 1.35
analysis used data collected by the Swedish National Board Economic profit 17.1 0.10 311.5 0.47
of Fisheries and from a sample of vessels’ tax reports for
the year 2001. The merged data set included information
on annual fishing effort, gross revenues and total costs. The substantially up to around 400 tonnes, after which there
initial sample included 37 vessels, but due to various were relatively small-scale economies (Fig. 3).
missing data items, the final analysis was carried out using The estimate of potential rent and overcapacity was
30 observations only. based on the assumption that the sampled vessels were
A translog cost function and two share equations for replaced by the larger vessels in the sample, each landing
capital and fuel were estimated with a seemingly unrelated 300–400 tonnes in 2001, and that these were given IVQs of
regression procedure. The R2 statistics for the cost function 660 tonnes. This would have led to a cost reduction of more
was 0.999, while the corresponding figures for the two than 30% (Table 3). Ten larger vessels instead of the
share equations were 0.855 and 0.962, respectively, existing 30 vessels could have harvested the same amount
indicating a good fit of the data. From the model, the of fish, which corresponds to a reduction in gross registered
optimal catch in 2001 was estimated to be 660 tonnes. The tonnage (GRT) of about 50%. This would have led
unit costs for annual landings were found to decline to a total economic profit of h9–10 million, which
corresponds to almost 30% of the total landing value in
2001 (h32 million). In contrast, the fleet in 2001 was
Table 2
estimated to be making negative economic profits (i.e.
Observed and potential rents, Icelandic trawlers, average per vessel economic losses) in the order of h0.5 million.

Observed Potential 3.4. Denmark

Tonnes h’000 h/kg Tonnes h’000 h/kg
The Danish study considered the trawler fleet below
Harvest level 4821 8000 50 GT/GRT, operating in all Danish fishing grounds, over
Revenue 8658.3 1.80 14368.7 1.80 the period 1995–2000. The fleet operated under a similar
Costs 8032.4 1.67 7097.8 0.89
Economic profit 625.9 0.13 7270.9 0.91 system to the Swedish fleet, with a non-transferable
individual vessel quota system allocated on a weekly basis.
 ARTICLE IN PRESS
F. Asche et al. / Marine Policy 32 (2008) 920–927
Table 4
Observed and potential rents, Danish vessels, average per vessel
Observed Potential
Tonnes h’000 h/kg Tonnes h’000
Harvest level 81 296
Revenue 173.0 2.14 633.0
Costs 180.0 2.22 490.0
Economic profit 7.0 0.09 143.0
The main species targeted by the fleet were cod, flatfish and
lobster. Data collected by the Danish Food and Economics
Institute were aggregated on an annual basis for each vessel
included in the dataset. In total, 176 observations were
available for the analysis. As with the other fleets with non-
transferable individual quotas noted above, the vessels on
average were estimated to be earning economic losses over
the period examined (Table 4).
The fleet capacity was analysed using a generalised
Leontief cost function with four outputs; cod, lobster,
flatfish and other species. The adjusted R2 statistics for the
cost function was 0.48. From the model, and assuming that
vessel in the fleet will continue to catch the four species in
same fixed proportions, the optimal level of output was
over three times the current level (Table 4). Given the
current TACs, this would require a fleet reduction of
around 74%.
The results of the analysis are not considered unrealistic.
The optimal output was similar to that observed for the
vessels with the greatest level of output, while the highest
observed level of vessel profits were around h86k While this
is less than the potential economic profits, it was also
achieved under conditions of overcapacity.
3.5. UK
The UK study considered the demersal trawl and seine
fleet operating in the North Sea, Irish Sea and English
Channel. These vessels primarily catch cod and other
whitefish species that are subject to an individual vessel
quota system, as well as a number of non-quota species.
The individual quota was readily transferable on an annual
basis (i.e. through leasing), although permanent transfers,
while possible, were complicated. Hence, little adjustment
through quota trading has been observed in the fleet.
Data on costs, revenues and physical characteristics for
67 UK demersal whitefish trawlers relating to the 2001
financial year were available, representing roughly 9% of
the total whitefish trawl fleet. These data were collected
through personal interview by the Seafish Industry
Authority (SFIA) for the North Sea and Irish Sea, and
by CEMARE for the English Channel. Data on the
individual capital value for the boats surveyed by SFIA
were not available, which has implications for the
interpretation of the results presented below.
925
Table 5
Observed and potential rents, UK vessels, average per vessel
Observed Potential
h/kg Tonnes h’000 h/kg Tonnes h’000 h/kg
Harvest level 336 1574
2.14 Revenue 494.2 1.47 2314.6 1.47
1.65 Costsa 412.0 1.23 1566.0 1.00
0.48 Financial profita 82.1 0.24 748.6 0.48
a
Exclude depreciation and the opportunity cost of capital, so are an
overestimate of rent and underestimate of the total cost.
A translog cost function and associated share equations
were estimated using seemingly unrelated regression. The
adjusted R2 statistics for the cost function was 0.901,
indicating a good fit to the data. Estimates of the average
output, revenue, costs and profits for the observed and
optimal scale vessels are presented in Table 5. The optimal
vessel size implied by the model was larger than that
observed in the data, so may be overestimated. The optimal
profit level, however, was close to the largest observed in
the data, so the results were not considered unrealistic.
The profit estimates in Table 5 are not true rents as they
exclude non-cash capital costs (i.e. economic depreciation
and opportunity cost of capital), as capital costs were not
available for most of the vessels in the analysis.6 Previous
economic studies of the fisheries that included non-cash
capital costs concluded that resource rent in the fishery was
negative [2]. However, the profit estimates provide an
indication as to the potential increase in vessel profitability
that may occur through fleet restructuring.
If the vessels tend over time to move to the optimal scale
identified by the cost function, the fleet size would need to
reduce by 79%. Given that it is unlikely that all vessels will
become fully efficient, even under an ITQ programme, the
optimal fleet reduction implicit from the analysis is most
likely an overestimation, as is the level of profitability
associated with the optimal fleet size. However, if vessels in
the reduced fleet are able to operate at, say, 90% efficiency
on average, then profits in the order of 22% of revenue
could be expected, with fleet reductions of around 70% still
being required.
4. Discussion and conclusions
The main results for the case study fisheries—the
potential rents and overcapacity—are summarised in
Table 6. The reported results from the case studies may
appear dramatic or even unrealistic to a fisheries manager.
More than half of the vessels were estimated to be
potentially redundant in all case studies. Potential econom-
ic profits were estimated to be between 20% and 30% for
6
A proxy for capital costs (insurance costs) was included in the analysis,
so the estimate of the optimal sized vessel takes account of increasing
capital costs with size.
 ARTICLE IN PRESS
926 F. Asche et al. / Marine Policy 32 (2008) 920–927
Table 6
Potential rents and overcapacity in the five case study fisheries
Country Potential rents as % of % Reduction in the fleet
landed value to achieve this rent
Norway 61 65
Iceland 51 50
Sweden 30 50
Denmark 22 67
UK 32 79
Table 7
Average ex-vessel price and quota lease price, Iceland (h/kg)
Year Quota lease price Ex-vessel price
1997 0.89 1.06
1998 0.95 1.29
1999 1.08 1.49
Source: The Icelandic Fresh Fish Price Directorate.
Denmark, Sweden and the UK, and even higher for
Iceland and Norway. In contrast, with the exception of
Iceland, the actual level of economic profits in most of
these fisheries was found to be negligible if not negative.
However, the results of the analysis are realistic given what
has already happened in Iceland after the ITQ system was
introduced there. Economic profits increased as a conse-
quence of quota trading and autonomous capacity reduc-
tion [18]. Indeed, the Icelandic fleet was the only fleet for
which positive economic profits could be identified in the
observed data. Moreover, there seems to be further
potential for increased efficiency in the Icelandic fleet
studied here.
A further validation is to study the empirical evidence
from the Icelandic quota market. In an ITQ fishery, one
expects the annual lease price of a quota unit to reflect the
rent per unit of fish that the quota entitles the holder to
land. For the Icelandic cod fisheries, lease prices for
quota varies between 73% and 84% of the ex-vessel price
(Table 7). There are several signs that the Icelandic quota
market has not reached long-run equilibrium [19], and the
willingness to pay for an additional unit of quota is
determined by short-run considerations (i.e. excludes fixed
costs as the marginal cost of catching the additional unit of
fish depends only on the variable costs). However, even if
the quota-leasing price is higher than the rent, the Icelandic
quota lease market indicates that the share of rents in total
revenue is substantial.
Few studies have empirically investigated the potential
for rent or efficiency gains in a fishery, with Dupont [10]
and Weninger [11] as two exceptions. Dupont [10] found
that in the Canadian Pacific salmon fishery, potential rents
were about 42% of total revenue. Weninger [11], for the
US surf clam and quahog fisheries, estimated that the fleet
could have potentially been reduced by about 80% when
IVQ were introduced. Hence, although these results are not
strictly comparable to our study, it seems clear that both
the forgone potential rent and overcapacity in traditionally
regulated fisheries are substantial.
A key factor differentiating the case studies was the
degree of transferability of the quota. Only the fisheries in
Iceland were observed to be generating any rents in the
observable data. Although the race to fish was eliminated
through the introduction of an IVQ system, the principle
benefits in terms of rent generation can only be realised
through fleet restructuring, i.e. moving to fewer, more
efficient vessels. Without transferability of the quota, this
restructuring could not occur. In all five case study
Ratio (%)
fisheries, there was substantial overcapacity when the
individual quotas were introduced. With the exception of
83.4 the Icelandic fishery, the costs associated with the
73.5 competition for the fish were primarily related to this
72.7
overcapacity, as it has not been possible to reduce
harvesting cost to a level where rents are generated.
Simple buyback programs that purchase inefficient
vessels out of the fishery will not help to solve this problem
[20]. As it is the least efficient vessels that are generally
removed first, a substantial portion of the fleet needs to be
removed before overcapacity is actually reduced. Further,
incentives remain (and in some cases are enhanced) for the
remaining vessels to increase their own level of capitalisa-
tion. Overcapacity in European fisheries persists despite
ongoing buyback schemes over more than 20 years [21].
Even if buyback programs were effective, it is unlikely
that any country would provide funding to achieve the
optimal levels, given the substantial fleet reductions
required. There is a close relationship between the number
of vessels removed from a fishery and the reduction in the
number of fishers. The more efficient a fishery is made
through capacity reduction, the larger the reduction in
employment in the fishery and local communities. This is
counter to social policies that may be concerned with
protecting societies along remote coastlines. Hence, there is
likely to be little political will to encourage substantial
capacity reduction in order to improve the profitability of
one sector of society at the expense of others.
Conversely, rent dissipation through overcapacity can be
considered a real subsidy to coastal communities. Since the
labour and capital used to create the overcapacity do not
contribute anything to the value added in society (and may
in fact reduce long-run production), the size of the subsidy
is not only the resource rent that is not generated, but also
the loss of value added that this effort would have created
if it were put to use in other sectors of society. This cost will
only disappear if there are no other sectors that these
factors can be used in, and the opportunity cost of labour
and capital falls to zero.
Improving transferability of quota is likely to be the only
feasible solution to reduce overcapacity and generating
resource rents in the fishery. The potential profits identified
in the study may never be achieved even with an efficient
management system. However, the incentives inherent in a
 ARTICLE IN PRESS
F. Asche et al. / Marine Policy 32 (2008) 920–927
tradable IVQ scheme provide Adam Smith’s ‘‘invisible
hand’’ to direct the fishery in the right direction.
Acknowledgement
The authors wish to acknowledge the financial support
of the European Commission (FAIR Contract no. CT
2001-01535). The views expressed herein are those of the
authors and are not to be attributed to the European
Commission.
References
[1] Gordon HS. The economic theory of a common property resource:
the fishery. Journal of Political Economy 1954;62:124–42.
[2] Coglan L, Pascoe S. Separating resource rents from intra-marginal
rents in fisheries economics survey data. Agricultural and Resource
Economics Review 1999;28(2):219–28.
[3] Hardin G. The tragedy of the commons. Science 1968;162:1243–8.
[4] Munro GR, Scott AD. The economics of fisheries management. In:
Handbook of natural resource and energy economics, vol. 2.
Amsterdam and Oxford: North-Holland, 1985. p. 623–76.
[5] Homans FR, Wilen JE. A model of regulated open access resource
use. Journal of Environmental Economics and Management
1997;32:1–21.
[6] Grafton RQ, Arnason R, Bjørndal T, Campbell D, Campbell HF,
Clark CW, et al. Incentive-based approaches to sustainable fisheries.
Canadian Journal of Fisheries and Aquatic Science 2006;63:699–710.
[7] Squires D, Campbell H, Cunningham S, Dewees C, Grafton RQ,
Herrick Jr. SF, et al. Individual Transferable Quotas in Multispecies
Fisheries Marine Policy 1998;22:135–59.
[8] Grafton RQ, Squires D, Fox KJ. Private property and economic
efficiency: a study of a common-pool resource. Journal of Law and
Economics 2000;XLIII:679–713.
927
[9] Wilen JE. Renewable resource economists and policy: what
differences have we made? Journal of Environmental Economics
and Management 2000;39:306–27.
[10] Dupont DP. Rent dissipation in restricted access fisheries. Journal of
Environmental Economics and Management 1991;19:26–44.
[11] Weninger Q. Assessing efficiency gains from individual transferable
quotas: an application to the Mid-Atlantic surf clam and ocean
quahog fishery. American Journal of Agricultural Economics 1998;
81:750–64.
[12] Asche F, Gordon DV, Hannesson R. Tests for market integration
and the law of one price: the market for whitefish in France. Marine
Resource Economics 2004;19:195–210.
[13] Asche F, Bjørndal T, Gordon DV. Fishermen behaviour with
individual vessel quotas—over-capacity and potential rent. In: Paper
presented at the XVth annual conference of the European Associa-
tion of Fisheries Economists, IFREMER, Brest, 14–16 May 2003.
[14] Eggert H, Tveterås R. Potential rent and overcapacity in the Swedish
Baltic Sea trawl fishery for cod (Gadus morhua). ICES Journal of
Marine Science 2007;64:439–45.
[15] Gudmundsson E. Capacity reduction in the Icelandic trawler fishery.
In: Paper presented at the 16th annual European Association of
Fisheries Economists meeting, Rome, 5–7 April 2004.
[16] Hoff A, Frost H. Optimal vessel quotas and capacity of a Danish
trawler fleet segment: a dual approach. Marine Resource Economics
2007;22:1–14.
[17] Pascoe S. Estimation of cost functions in a data poor environment:
the case of capacity estimation in fisheries. Applied Economics
2007;20:2643–54.
[18] Arnason R. On the ITQ fisheries management system in Iceland.
Reviews in Fish Biology and Fisheries 1996;6:63–90.
[19] Asche F. Fishermen’s discount rates in ITQ systems. Environmental
and Resource Economics 2001;19:403–10.
[20] Holland D, Gudmundsson E, Gates J. Do fishing vessel buyback
programs work: a survey of the evidence. Marine Policy 1999;23:
47–69.
[21] DG Fish. MAGP IV not effective enough in dealing with over-
capacity. EU press release 01.10.2000. /http://www.europa.eu.int/
comm/fisheries/pcp/faq2_en.htmS.