In economic theory market failure happens when the price mechanism fails to allocate scarce resources efficiently which can lead to a net social welfare loss. It is evident when the competitive outcome of markets is not satisfactory from the point view of society.
Seafood in New Zealand is one of its largest export markets, with 85% of catches being exported. Over 90% of the total revenue raised by the country’s fishing industry comes from exported stocks, raising NZ$3 billion annually. The Quota Management System (QMS) was introduced by the Fisheries Amendment Act 1986, covering 93 marine species. The vast majority of New Zealand’s commercial marine resources were bought up by several large companies, with three local groups – Sanford, Sealord and Talley’s – holding about 60%. The then Labour government under Finance minister Roger Douglas implemented market-based economics limiting the harvest and creating a private property rights to fish.
Since that deal, quota owners paid resource rentals, for a few years, but largely for the past 40 years, the commercial fishing industry has not paid for the use of publicly-owned resources. How it works:
- Fishers own or lease the right to catch a proportion (quota) of the Total Allowable Catch (TAC) of a particular species of fish.
- Quotas can be freely traded.
- Companies are allocated the right to catch a specified tonnage of fish, an Annual Catch Entitlement (ACE),
- ACE can be traded with others.
Costs of QMS
- It has created powerful lobby group which protects the interests of the those who own the quotas – profit driven rather than sustainability
- It blocks initiatives to rebuild stocks
- It has seen the demise of the small fishing operations which has led to increased unemployment in rural coastal areas. This is especially prevalent for Māori.
- No rental fee to a commercial catch = overfishing
- Trading quotas earns more revenue than actually catching fish – again this comes at the expense of local fishers.
- It is in breach of the Treaty of Waitangi
How do the Faroe Island approach fisheries?
Fishing accounts for 95% of exports and 50% of the Faroe Island’s GDP. All living marine resources remain the property of the people and cannot become privately owned or sold abroad. Overall they have a much more public good approach to the market for fish and its sustainability:
- Fishing licences are not private property and can’t be traded
- Licences go through a public auction and the money is put back into the economy – e.g. healthcare, education etc.
- System is based on part quotas and how many days are spent at sea.
- Faroe Islands have designated areas for small boats / angling, and closes some areas to protect juveniles and spawning stock.
- They also preserve ecologically significant seabed habitat such as corals.
Sustainability as part of a country’s national accounts
Conventional GDP accounts are a poor measure of sustainability as the figures capture only market transactions and doesn’t show the depletion of natural resources. A country that runs down its stock of machinery and fails to replace them will be shown to have a lower GDP figure. However a country depleting it fisheries will appear to be richer in GDP terms. There is a greater need to develop ways of valuing natural assets such as the atmosphere and the sea and make them part of a country’s GDP. Kate Raworth – doughnut economics – has addressed some of these issues regarding Earth’s life-supporting systems including the oceans.
Below is a very informative documentary ‘The Price of Fish’ which examines the real cost of the QMS. It has various personalities including Matt Watson of ‘The Ultimate Fishing Show’.
For more on Market Failure view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.