Abstract
This paper investigates production license management when regulation constrains the number of production licenses to address production externalities. This is increasingly relevant for aquaculture production where disease issues threaten future seafood supply. The regulatory problem is analyzed in the context of Norwegian salmon aquaculture where a stop in issuance of new production licenses has been implemented to address social costs of parasitic sea lice. Our theoretical model shows that restricting number of licenses raises prices and shifts production efforts excessively towards greater stocking of fish per license. Hence, the policy cannot achieve a first-best welfare-maximizing allocation. Furthermore, restricting entry by limiting number of licenses can create regulatory rents, which effectively subsides rather than tax the source of the externality.
Highlights
This paper investigates the difficulty of efficiently limiting production growth by restricting number of licenses without addressing other available production margins
We develop a simple economic model of salmon farming with externalities in production
While specifying the exact social costs of the sea lice externality in Norwegian salmon farming is beyond the scope of this paper, we argue that the policy response of excessive stocking density is unlikely to be compatible with the objective of the policy
Summary
This paper investigates the difficulty of efficiently limiting production growth by restricting number of licenses without addressing other available production margins This relates our paper to other work in regulation theory showing the problem and complexity of regulating single decision variables when multiple margins are available (Smith 2012; Squires 2016). In Norwegian salmon aquaculture, the major current issue is the prevalence and spread of parasitic sea lice. The number of fish at a farm location raises abundance of sea lice and the rate of spread between farms (Kragesteen et al 2019; Jansen et al 2012). Kragesteen et al (2019) argue that the spread of lice between farms leads to a tragedy of the common operational environment, with well-known coordination issues. Contagion in open water sea pens means the sea lice becomes a negative externality in salmon farming
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