Is there a free-market solution to overfishing?

Overfishing is often presented as a classic example of market failure. When individual fishing enterprises are competing, the benefits of winning the ‘race to fish’ accrue to the successful ones, while the costs of depletion are shared among all the fishermen in the fishery. There are therefore poor incentives for conservation – the so-called ‘tragedy of the commons’.

This is a simplistic interpretation, however. Market feedback mechanisms offer some protection to stocks. Declining yields will tend to force less efficient fishermen out of business, for example. Providing there is free trade in fish and substitutes are available in food markets, the combination of increasing costs and declining catches may not be offset by higher fish prices. The outcome will partly depend on the species in question. Its scarcity value, reproductive behaviour and migration patterns may affect the probability that overfishing leads to a collapse in stocks.

The history of the fishing industry shows overfishing has been hugely exacerbated by government intervention, in particular subsidies for uneconomic fishing businesses. These handouts have undermined the market mechanisms that would have helped to conserve stocks. The resulting overcapacity – too many vessels chasing too few fish – has strengthened the rationale for costly and bureaucratic regulation of the sector, as exemplified by the EU’s Common Fisheries Policy. As public choice theory would predict, such regulation has inevitably been subject to politicisation and lobbying by special interests, which has meant problems with overfishing have persisted. The creation of artificial property rights by governments, such as the Individual Transferable Quotas used in Iceland, has tended to deliver superior allocative efficiency compared with other forms of regulation, but has not been immune to special-interest influence or indeed discarding.

These problems raise the question of whether an unhampered market could solve the problem of overfishing. Clearly the removal of direct and indirect government subsidies would go a long way towards resolving the issue. However, it would not remove the tendency entirely and both yields and efficiency could still be suboptimal. While collapses would be less likely, they would not be impossible – and there are indeed examples that pre-date direct state subsidies to the industry.

There would therefore appear to be a trade-off between competition and efficiency. This is the case in many sectors, for example due to the ‘transaction costs’ resulting from competition, or because competition means economies of scale are lost (the rail industry is a classic example). Indeed it is a common misperception that unhampered markets inevitably produce a high level of competition. It depends on the characteristics of the sector concerned. One way markets can reduce transaction costs and capture economies of scale is through mergers and acquisitions.

In the fishing industry there are potentially major efficiency losses from competition in the form of the ‘race for fish’, both in terms of wasteful duplication of equipment, fishing effort and the depletion of stocks to suboptimal levels. There may therefore be strong incentives for fishing enterprises to merge or evolve into one large business (which could perhaps be some kind of cooperative) that held a near monopoly over fishing in a particular region. This dominant enterprise would then determine catch levels to maximise returns.

If fisheries remained ‘open access’, how could this structure be sustained? The market solution may be vertical integration. The dominant firm would merge with the harbours and/or the distribution operations in the region and perhaps even the fish processing industry, enabling it to exclude local competitors and to capture economies of scale that would act as a further market-based barrier to entry. Competitors from further afield would face much higher costs to reach the fishery. Nevertheless, initially the dominant firm might choose to deter them by deploying some of its vessels in a ‘race to fish’ in order to drive them elsewhere. Clearly there would be strong incentives to develop agreements between neighbouring firms not to stray into each other’s area of operation, to avoid the costs of such behaviour, and possibly also rules regarding migrating fish.

Subsidies from foreign governments to their own industries could upset this market outcome by artificially sustaining the ‘race for fish’, which raises issues regarding state protection of territorial boundaries within the current system of Exclusive Economic Areas. However, in principle there is no reason why these dominant firms or associations should not straddle existing national boundaries, with their geographical extent evolving according to market conditions.

This analysis also suggests that the state ownership/subsidy of fishing ports and associated distribution infrastructure (resulting again in substantial overcapacity) is likely to be a key factor in hindering a market solution to the problem of overfishing. In some countries there could also be problems with competition rules.

Finally it is important to consider the impact on consumers. The ‘market power’ of the vertically integrated firms would be severely limited. Under free trade they would be competing with fish suppliers from around the world, including produce from fish farms. Moreover, fish can be substituted for other foodstuffs and make up only a small percentage of the overall food supply. And the benefits would be substantial. A market solution to overfishing would deliver major benefits for consumers, with higher yields leading to lower prices and improved quality. At the same time, the inefficiencies, subsidies and special-interest influence associated with state-imposed fisheries policies would be avoided.