Economics of the 2014-2015 DebateTopic: Developing Ocean Resources

Special Publications | Environment


Monday, June 23, 2014
by Michael D. Stroup

Developing the Earth’s Ocean Resources Is a
Complex Issue
The Earth’s ocean resources have unique characteristics that make the process of resource development quite complicated. The complexity arises because rights to use the ocean’s resources are not well defined. Those who use the resource are not held accountable for how their usage ultimately affects the market value of that resource. As a result, ocean resource users are not motivated to develop this resource to its highest potential market value.

To understand why, try to imagine that you are the captain of a computer-guided fishing vessel out at sea, trawling for a good day’s catch. After hauling in your high-efficiency net, you verify that the total numbers of cod in these waters are dwindling. Though a decent number of fish dump out flopping on the deck, it is just not as many as in seasons past. Despite your modern, high efficiency boat and equipment, you spend longer periods of time each season out at sea to fill your hold before returning home. You realize that if you cut back on your harvest this season, this sacrifice would help restore the fish stock for better harvests next season. However, you know that this personal sacrifice would be made in vain, because the other ship captains would simply continue harvesting as much cod as they can. So you press on with your own harvest.

When technological advances make ocean resource harvesting more efficient, a once abundant ocean resource can become quite scarce. It may even be over-harvested until it cannot be sustained for future generations to enjoy. In a normal market setting, the owners of a diminishing resource would simply raise their selling price as it became scarcer. Consumers would then conserve the resource by turning to more abundant and cheaper substitutes to satisfy their demands. However, a normal market process for ocean resources often doesn’t exist because the ownership rights to buy and sell ocean resources are often unassigned. Resources without owners end up being used in common, on a first come, first served basis. Anyone trying to preserve a common use resource, or trying to improve it for a better, later harvest, cannot be assured that the resource will still be available in the future. This makes it much harder to effectively develop ocean resources in a way that makes them as economically valuable as possible to society.

The "Tragedy of the
Commons"
Sociologist Garret Hardin called this situation “the tragedy of the commons.” Whenever the ownership rights to a shared valuable resource are not assigned to anyone, the resource users can only gain benefits by using up the resource before any others can use it. There is no motivation to preserve or increase the value of the resources. Indeed, governments often use a potential “tragedy of the commons” to justify taking over the management of ocean resources. But this raises the question: Is public management the only option for promoting good stewardship of ocean resources?

Property rights philosopher H. Sterling Burnett examined the economic development of the world’s fisheries over the last half of the 20th century. He found that the tragedy of the commons was plainly evident for tuna, cod, swordfish, marlin and halibut populations, whose numbers had dwindled by as much as 90 percent during this period. He noted that during the 1970s and 1980s, federal government subsidies to the commercial fishing industry encouraged the development of new fish harvesting and processing technology. This generated a big increase in the productivity of commercial fishing fleets. That is, fishers were able to catch more fish with the same number of boats or in the same number of days of fishing. However, the tragedy of the commons for ocean fish stocks was intensified in the following decades and the size of fish catches plummeted each season.

In response to diminishing fish stocks, the federal government passed the Sustainable Fisheries Act of 1996, and the Magnuson-Stevens Fisheries Conservation and Management Reauthorization Act of 2006. These acts were an attempt to publically manage the ocean fish stocks through regulation. These acts allowed only U.S. fishing boats to harvest within 200 miles of the U.S. coastline. They limited the total size of American fishing fleets, required commercial fishermen to use smaller fishing boats and trawling nets, limited the total number of legal fishing dates, and enforced stricter quotas on the amount of fish that could be brought in to shore.

Unfortunately, this regulatory approach did little to hold commercial fishermen directly accountable for the consequences arising from their individual fish harvesting decisions. Fishing boat captains simply expended greater fishing effort in their smaller boats by taking them out to sea more often during the open fishing dates. They also used smaller but more efficient trawling nets. Further, as the fishing boats returned to port, they threw overboard all the smaller, less valuable fish they had already harvested, in order to meet the strict catch quotas that were enforced onshore. This centrally designed and enforced regulation was an unsuccessful attempt at managing a common use resource. While it is clear that in the absence of any assigned ownership rights over an ocean resource, commercial fishermen harvesting a common use resource like cod wasted some of that ocean resource. However, the federal attempt at a centralized, regulatory development policy did not fare any better.

This kind of outcome was predicted by economist Elinor Ostrom. Her empirical research concluded that a common use resource managed by a large and remotely located central government is rarely as efficient as giving direct control over portions of the resource to small groups of local resource consumers. She found that the local resource user can best evaluate how to develop a commonly used resource based on their access to localized knowledge and prevailing cultural norms surrounding the development and use of the resource. In her judgment, the best role of the government would be to establish private property rights (ownership rights) over a commonly used resource and allow competition between resource users to determine the best method of resource development.
Why should we expect that public development of ocean resources by the federal government would tend to diminish their market value, whereas granting private ownership to the users of the resource would tend to raise the value of ocean resources? To understand and contrast how both private and public resource managers are likely to handle ocean resource development differently, we must first appreciate how the incentives facing each type of resource manager are very different, affecting their respective ocean resource development decisions in different ways.

Proper Institutions Can Motivate Beneficial Private Resource Development
To understand how creating private ownership of common use resources could improve the incentives facing ocean resource users, it is important to appreciate how society’s institutions can be used to influence the behavior of the private individuals and groups involved. Institutions are those sets of rules in society that influence the interaction of individuals and groups, or the interaction of the government and the governed. These rules are enforced by the government, as well as by local cultures. Economists Jim Gwartney, Richard Stroup and Dwight Lee note that properly designed institutions can create incentives to align the self-interest of individual resource managers with efforts to develop resources to their highest market value . Two important institutions include:

Private property rights, which are the explicit rules of resource ownership that define the degree of freedom that the resource owner can exercise over that resource. This includes the acts of consumption, exchange and disposal of the resource.
The rule of law, which is the foundational set of rules enforced by a legitimate governing body that explicitly directs how individuals are to interact in activities such as commerce (production and voluntary exchange) and politics (freedom of speech, political association, worship and so forth).

For an illustration of how these two institutions affect resource development decisions, imagine that a recently deceased relative left you in her will a plot of timberland with a young stand of potentially valuable hardwood trees. Just like an ocean fish stock, this stand of hardwood trees are also a renewable resource that have some value if harvested today, but will have greater value if these trees can grow to a healthy, mature timber stand that creates the most possible market value. However, just like an ocean fish stock, the value of this stand of trees could be diminished if they were harvested too quickly, either by the resource owner or by a competing resource user. In this case, society would not be able to enjoy the higher quality and quantity of mature timber that this stand of trees would yield in the future. Even if you personally had no interest in managing this tract of timberland yourself, how would these two sets of institutions motivate you to bring this renewable resource to its highest valued social use? In other words, why would you be more willing to conserve and invest in the social value of this resource if you were assigned the property rights to the resource?

Private Property Rights. If you have been assigned the private property rights to a resource, this means you can fully benefit from managing it in a way that makes it more attractive to other potential owners. If you were to invest in improvements to this resource, you would not be forced to share with anyone else the resulting gains in value of your resource.

For example, when you decide to delay harvesting your trees until their value increases in future years, nobody else has the right to harvest them before then without your permission. If you hire a forester to protect your trees from disease and insects, this costly investment will pay off when these healthy trees are harvested at their highest potential value at some future time. Even if your personal time frame were short and you decide to sell this resource before that future date, a potential buyer will still offer you a much higher bid for your timberland that reflects its higher future value. Like the “carrot and stick” analogy of incentives, the institution of private property rights uses the potential gains from conserving and protecting your private resource as a positive motivator to develop your resource into its highest social value.

Conversely, private property rights require that you alone bear the full loss in resource value if you were to ignore the potential for enhancing its value for other buyers. You would not be able to make anyone else share the burden of losing resource value if you harvested the trees too soon, or if you neglected to protect the trees from destruction by disease or insects. You would know that these neglectful actions would prevent a potential buyer from offering you a high bid to buy the ownership rights for your tract of timberland when you wanted to sell it. Furthermore, you alone would bear any losses from making mistakes in your calculations about the present day costs of preserving and maintaining the timber stand, as well as the estimates of its true future valuation. This means you are more likely to use only trustworthy and accurate estimates for comparing these potential costs and benefits while making your resource management decisions. Again, like the “carrot and stick” analogy of incentives, the institution of private property rights also uses the potential losses from failing to conserve and protect your private resource as a negative motivator to develop your resource to its highest market value.

Rule of Law. Just like fish harvested from an ocean fish stock, the timber harvested from your stand of hardwood trees can be sold in markets. A market transaction means that the ownership rights of the resource changes hands from the harvester to the consumer, in return for a payment from the consumer to the harvester. However, your choice to bear the current costs of investing in a higher, future social value of your timberland will depend upon the confidence you have in being able to successfully transfer the private property rights over your timber to the consumer who values it the most (such as selling it to the highest bidder). The success of this property rights transfer depends on the rule of law governing all resource sales.

Your willingness to pay for resource development costs prior to receiving any compensation, and the willingness of the buyer with the highest valuation to commit to paying you for the right to own the resource, both depend on the relative trust that each of you have in the process of successfully completing this important transfer of property rights. If the rules governing the contracts for such transfers were inconsistent and unreliable, or the rules did not treat both the buyer and the seller equitably, then neither you nor the buyer would have faith that the stipulations of the sale contract would be enforced. This lack of trust would make such trades much less likely to occur, removing much of the motivation for you to preserve and maintain your resource.

The above example illustrates that assigning private property rights over a renewable resource (whether it be a stand of hardwood trees or a school of fish) and allowing the market exchange of these rights to be transacted under a fair and consistently applied rule of law, will tend to motivate private resource owners to develop their resources to the highest market value. However, might it also be possible to motivate a government resource manager to also develop a common use resource to its highest market value? After all, developed countries are led by democratically elected, representative governments. If society desires a resource to be developed into its highest market value, wouldn’t their preferences be effectively reflected in publically managed resource practices guided by a democratic government? To answer this question, we must first understand how the incentives facing public sector resource managers are very different than those facing a private resource owner.

Public Management Does Not Ensure Efficient Resource Development Practices
An analogy to publicly managing commonly used ocean resources can be found in how our federal government uses various agencies to manage the commonly used natural resources found on our vast areas of public lands in the United States. The largest federal land manager agencies are the Bureau of Land Management (BLM), the U.S. Forest Service and the U.S. Fish and Wildlife Service. Their prevailing management approach has been to allow multiple, simultaneous uses and development of the land and its natural resources by private users. This approach to public management of common use resources is known as the “Multiple Use Doctrine.” Examining how this resource management process works on public f lands can reveal how the federal government might manage and develop the Earth’s ocean resources.

At first glance, a multiple-use doctrine over any common use resource sounds like an efficient political compromise for allocating user rights among competing resource developers. The public management rules that guide the resource development process on federal lands are determined through a process of democratic representation. Voters elect federal representatives (Congressmen and Senators). These representatives create federal laws governing resource development and appoint agency managers to interpret these laws and implement resource management policies to best develop the nation’s common use resources.
However, political scientist Margaret Moore notes that multiple-use policies on federal lands have been criticized as being designed for developing resources in a way that achieves political expediency rather than economic efficiency. In other words, the rules governing how common use resources are developed on federal lands may have been designed to maximize congressional support to satisfy political interests, rather than for developing the resource to its highest market value.

Democracy Does Not Guarantee Efficiency. Indeed, political scientist Randy Simmons notes that while market outcomes in a free enterprise system may not always efficiently allocate a resource, there is no reason to assume that democratic political outcomes will automatically create an efficient allocation of that same resource.

To illustrate his point, Simmons sets up a simple democratic voting example that uses a majority rule approach to designing public policy. His example shows how a resource development policy can achieve majority support from Congress without creating an efficient resource development outcome. Try to imagine that timber, mining and fisheries industries all currently operate at some level on existing federal lands. Assume each industry is trying to increase the scope of their own resource development operations. However, when their own operations increase, this imposes some additional costs on the other two industry operations. For simplicity, we will assume that these three industries are the only politically relevant industries that can generate significant congressional influence on the future policies of federal agency land managers. We will also assume that each industry commands an equal share of public and congressional support.
Now consider how the political process of democratic representation will likely influence the allocation of rights for resource development on federal lands. If any one industry were the sole industry allowed to increase its development operations on federal lands, it would be worth, say, $2 billion in extra value annually to that industry. However, allowing either of the other two industries to also increase their operations on federal lands would impose a loss in value to the first industry of $1 billion for each of the other industries’ increased activity. Would a democratic process assure an economically efficient allocation of resource use rights across federal lands? There are three possible land use allocations for resource development. Let’s examine each one:

Proposal #1: Only one industry is allowed to expand its use of federal lands. The winner gains $2 billion annually, but the two other industries would each lose $1 billion annually. This means there is no net gain in total benefits across the three industries, and two of the three industries would experience a net loss. However, this is not a likely democratic outcome. Recall that each industry has roughly equal political support in Congress. If two industries are expected to lose and only one industry is expected to gain, this proposal would not receive the needed majority support in Congress.

Proposal #2: All three industries are allowed to expand their use of federal lands. None of the three industries would receive any net gains in resource value. Any positive gains (the additional $2 billion) would be fully depleted by the increased presence of the other two industries (each industry’s gain is reduced $1 billion by the presence of each of the other industries). If no industry stands to gain anything, this proposal would not receive majority support in Congress.

Proposal #3: Only two of the industries are allowed to expand their use of federal lands. Each of the two winning industries would enjoy a $1 billion net increase in annual resource development values (an additional $2 billion for expansion of their own industry, minus $1 billion from the increase in operations of the other industry). However, the losing industry would bear a $2 billion annual net loss in resource values from the expanded operations of the two other industries. There is no net increase in total benefits, as the total gains from the two included industries ($2 billion) equals the total losses experienced by the omitted industry ($2 billion). Yet, this proposal is indeed a likely outcome to expect from this democratic process, because it would receive majority support in Congress.

Despite the common catch-phrase that “democratic politics is the art of compromise,” this last allocation is neither economically efficient nor equitable, despite being the result of true democratic decision making. Why? First, it is not equitable because it forces one industry to bear the costs imposed by development efforts that will profit only the other two industries. Second, it is not efficient because all three industries are likely to expend resources lobbying the Congress to avoid being the sole loser in the only proposal that is assured to receive majority support in Congress. Each industry would likely spend up to the expected lost resource value they would experience, should they be chosen as the sole loser.
Not only does the outcome of such lobbying expenses create no direct net gain in benefits from resource development, the lobbying resources expended by all three industries diminishes the total market value in the process of developing the resource. These lobbying expenditures are akin to paying “protection money” just to avoid a future loss that would be created by the recipient’s actions if they failed to pay these expenses. This is not to be confused with individuals making insurance payments to protect themselves from losses due to acts of nature beyond anyone’s control. The former concerns losses that are avoidable, while the latter concerns losses that are unforeseen and not avoidable.

Some Examples of Inefficient Public Resource Management. Historically, federal development of natural resources on federal lands has received much political support. However, economic theory over the last few decades has begun to recognize and document the inefficiencies of resource management practices on federal lands. For example, Alexander Annett examined federal resource management and found many examples of the government itself reporting on its own resource development inefficiencies. For instance:

The U.S. General Accounting Office (GAO) reported that, in 1999, all federal land agencies together amassed a backlog of unresolved resource maintenance problems totaling about $12 billion. This is an example of the resource users avoiding the full cost of making poor decisions that diminish resource values by sharing these costs across U.S. taxpayers.

The Inspector General of the U.S. Department of Agriculture found “pervasive errors” in the accounting and financial reporting processes of the U.S. Forest Service. This is an example of not using trustworthy and accurate cost estimates to make good resource development decisions when the developer’s personal funds are not at risk.

A 1999 Congressional Budget Office (CBO) report addressed a request by the major federal land management agencies to expand their management practices to greater swaths of public lands. The CBO suggested that “environmental objectives such as habitat protection… might be best met by improving the quality of management in currently held areas, rather than trying to manage an even larger domain.” It appears the CBO recognized that further centralization of resource development would produce less efficient, rather than more efficient, resource development.

Public Resource Managers Do Not Face Effective Incentives. Clearly, public-sector managers of the country’s natural resources do not face the same incentive structure as private resource owners when trying to develop resources efficiently. In fact, they are insulated from the same incentives facing private resource developers. For example:

Public resource managers are not allowed to enjoy the full benefits from making good resource development decisions that raise the market value of the resource. It is perceived as unethical for public resource managers to seek private gains from public resource use.

Public resource managers are not forced to bear the full costs of making bad resource development decisions that lower the value of the resource. The public resource manager is insulated from making bad resource development decisions, because any resulting losses from diminished resource values are shared across all of the taxpayers.

Public resource managers are less likely to explore and discover innovative uses of the resource that enhance its value through entrepreneurial activity. The cost and risks of innovation and discovery outweigh the minimal public-sector rewards a public resource manager can expect for making good resource development choices.

Public sector managers are less likely to accurately compare true benefits against true costs. When direct rewards and penalties are not connected to specific resource development decisions, public resource managers are motivated to under-estimate the costs, and exaggerate the benefits, of their development policies. Further, it is difficult for voters or members of Congress — the vast majority of whom are not specialists in the resources being managed — to adequately determine the legitimacy of these claims and determine whether the resource is being developed in a way that enhances its economic value to society.

Indeed, when public resource managers are insulated from being held directly accountable for the quality of their resource development decisions, they are often perceived as being more effective only when their management scope, program budget and agency staffing continue to grow over time. Non-specialists can only assume that demands for ever more funding and staffing will enable public resource managers to make even better resource development decisions. In other words, failure to support these programs with additional funds and staff is perceived by the public as not adequately caring about the resource development issues that the public sector managers are facing. This misperception provides an incentive for public sector resource managers to artificially inflate the potential benefit measures assigned to their proposed resource development decisions, and to artificially deflate the true cost of taking funding away from other important but competing public sector programs. This strategy helps fund an ever larger scope of operations, which justifies bigger budgets and larger staffing needs.

Who Owns the Earth’s Ocean Resources?
It is worth considering to what extent the U.S. federal government retains a claim over the Earth’s ocean resources in a way that is recognized by other nations. Indeed, ownership rights for most of the Earth’s vast ocean resources have not yet been fully defined and globally allocated. International maritime laws have been widely recognized since the 17th century. However, under this global institution, a nation’s ownership rights over ocean resources were limited to a relatively small, three-nautical-mile belt of water extending from a nation’s coastlines. All ocean waters beyond that limit were considered international waters where all nations could navigate and exploit the resources in and under the oceans. For the bulk of the Earth’s vast ocean resources, any claims by private parties or governments have not been broadly recognized. Any development that did occur resulted from a nation’s unilateral claim to that specific resource, backed by observable efforts to extract or otherwise utilize the claimed ocean resource. This perspective reflected the natural law principle of mare liberum.

The Law of the Sea. More recently, however, international treaties that govern ocean resources along the continental shelf outside of national boundaries have been broadly (but not universally) adopted. The largest, most comprehensive treaty is the United Nations Convention on the Law of the Sea (UNCLOS), established in 1982. However, it has been recognized by only 60 of the over 200 countries around the world. This treaty stipulates that:

Ownership rights to all ocean resources, from the sea surface down to the seabed and below, are granted to a nation within a roughly a 12-nautical-mile extension of that nation’s coastal boundaries.

Exclusive Economic Zones (EEZs) are defined as roughly 200 nautical miles from the nation’s costal boundaries. In this zone, the country retains all ocean resource ownership rights, but that country must allow free transit (termed innocent passage) to peaceful ocean transport by all private and government-owned shipping vessels.

When a nation’s continental shelf extends beyond its EEZ, that nation has unlimited ownership rights to the nonrenewable resources on and under the seabed, but does not have ownership rights to the renewable resources within the sea or on the seabed.

Outside the EEZ or continental shelf zone, ownership rights to any renewable or nonrenewable ocean resources are not recognized by any one nation. However, many countries have negotiated various multiparty treaties regarding the renewable resources that transit across neighboring ocean areas. Further, some nations have tried to amend UNCLOS to allocate ownership rights to nonrenewable resources within the vast areas of the open ocean. The United States does not currently recognize this amendment.

Private Development of the Earth’s Ocean Resources is the Best Option
Aligning private rewards with public interests in resource development would encourage private ocean resource owners to develop these resources to their highest market value. This is made possible when the federal government creates innovative institutions that allow for the privatization of common use resource development. Indeed, an example can be seen from Burnett’s examination of world fisheries that was discussed earlier. His research reveals that some countries have tried privatizing certain types of fish stocks within their own EEZs. A process for scientifically maintaining a healthy fish stock is used to identify a maximum limit on total annual fish harvests. This total limit is then divided into individual transferable quotas (called ITQs), which are tradable units that can be bought and sold by fishing boat captains in a market exchange.

The owner of each ITQ has a private property right over a specified portion of the valuable ocean resource. No other potential fish harvesters can compete with those who already own the ITQs. When the total number of ITQ holders is fixed, it is easier for them to coordinate their harvest practices in a manner that encourages more conservation of and investment in the market value of the fish stocks. The private desire of ITQ holders to profit from commercial fishing is now aligned with the market value in protecting and growing the existing fish stock. They will bear the cost of any decisions that decrease the value of their resource (such as over-fishing) and reap the rewards of investing in practices that raise the value of the resource (such as purposefully avoiding catching the wrong age or size of fish). Even when an aging fisherman is considering selling his ITQ in a few short seasons, he will still be encouraged to enhance the value of the fish stock right up to the end of his career, in order to maximize the potential sales price of his ITQ to an eager, younger fisherman.

Burnett’s empirical investigations revealed that many countries have successfully used ITQ programs in their own EEZs. Examples include Iceland (herring), Australia (blue fin tuna) and New Zealand (blue fin tuna, abalone and lobster) and the U.S. (blue fin tuna, halibut and clams). In each of these cases, privatizing common use ocean resources both raised the incomes of commercial fishermen and increased the size of the commercial fish stocks migrating in each country’s EEZ. Even in the case of ocean resources that migrate across EEZs of different countries, it still is possible for those countries to cooperate to create a treaty that would grant private property rights over the ocean resource to users from each country in the form of a market for ITQs.

 Conclusion
A careful examination of public versus private ocean resource development indicates that federal policies for ocean resource development should avoid direct public management of these common use resources. The incentive structure facing public sector resource managers does not align private rewards with the public interest in developing ocean resources to their highest market value. As shown above, even a truly democratic setting can fail to produce economically efficient public resource development practices. Instead, the federal government should promote innovative ways to allow private ownership over common use ocean resources. When private resource development decisions are made while facing the full potential costs and rewards for enhancing the value of ocean resources, this maximizes the motivation for these resource owners to make development decisions that raise the ocean resource to its highest market value.

Bibliography
Annett, Alexander A. (1999), “The Federal Government’s Poor Management of America’s Land Resources,” The Heritage Foundation Backgrounder #1282 (http://www.heritage.org/research/reports/1999/05/govts-poor-management-of-land-resources).
Burnett, H. Sterling (2007), Ocean Fisheries: Common Heritage or Tragic Commons? NCPA Brief Analysis #581 (http://www.ncpa.org/pdfs/ba581.pdf).
Gwartney, James, Richard Stroup and Dwight Lee (2005), Common Sense Economics: What Everyone Should Know about Wealth and Prosperity, (New York: St. Martin’s Press).
Hardin, Garret (1968), “The Tragedy of the Commons,” Science, Vol. 162, No. 3859. Moore, Margaret A., Mitchel P. McClaran and Donna K. Chickering (1997), “Theory in Practice: Applying Participatory Democracy Theory to Public Land Planning,” Environmental Management, Vol. 21, No. 6.
Ostrom, Elinor, Joanna Burger, Christopher B. Field, Richard B. Norgaard, and David Policansky (1999), “Revisiting the Commons: Local Lessons, Global Challenges,” Science, Vol. 284, No. 9.
Simmons, Randy T. (2011), Beyond Politics: The Roots of Government Failure (Oakland, Calif.: The Independent Institute).

 

Read the full article.