Regulating a Common-Pool Resource when Extraction Costs Are Heterogeneous: Tax versus Quotas

Abstract

"We examine the choice of instrument to regulate a common pool resource, e.g. a fishery, previously extracted under free access. The fishermen have heterogeneous extraction costs. The goal of the regulation is to reduce the total extraction effort. It must be accepted by all fishermen in the sense that they must be better-off with the regulation than under free-access. We compare the efficiency of two regulatory instruments: a tax/ subsidy scheme (an access fee for the fishery and a subsidy for those who stop fishing) and uniform (and non-transferable) quotas.

"In this set-up, the first-best management of the resource requires to exclude the less efficient fishermen. It can be achieved with the taxation scheme but not with uniform quota. Yet the taxation scheme that implements the first-best might not be accepted by some fishermen and/or not be budget balanced. A uniform quota might be more easily accepted by fishermen.

"We first derive necessary conditions for the implementation of the first-best management of the resource with an acceptable and budget balanced taxation scheme. We then characterize the second-best taxation regulation under the constraint that it must be accepted by all fishermen and budget balanced. Due to the above constraints, it implements a higher extraction rate than the first-best.

"Next, we provide necessary conditions for the acceptability of a uniform quota. We find that a uniform quota benefits more to less efficient fishermen. In particular, despite an increase of average revenue, most efficient fishermen might be worse off than under free access, thereby refusing the regulation.

"Last, we compare the efficiency of the two instruments under the constraint of acceptability. Our analysis highlights that, due to the acceptability constraint, a higher reduction of fishing effort might be achieved under uniform quotas than under a taxation scheme at the cost of including less efficient fishermen."