Command-and-control regulations such as licensed entry and production quotas can lead to regulatory rents. This can lead to production distortions, undesirable wealth redistribution, wasteful rent seeking behavior , and can alter incentives in ways that might compromise the objective of the regulation
(Smith 2012; Squires 2016; Parry 2004)
We study rent formation and production distortions under maximum production regulations in Norwegian salmon aquaculture. In Norway, problems with sea lice (Lepeophtheirus salmonis) has led to a stop in the issuance of new production licenses.Consequently, Norwegian production is currently at maximum capacity. At the same time, demand for salmon has been strong, with record prices.
To analyze rent formation and production distortions we develop a general multiple-rotation optimal harvest and stocking model. The model is placed in two regulatory regimes: with and without a maximum production constraint on license production. With a maximum production constraint rents can be supported on the margin when licensing (entry) is fixed. This rent will mimic a resource rent creating potential confusion on the source of the rent in the industry. Furthermore, the regulatory rent incentivizes more intensive farming behavior with increased stocking of fish, a shortening of the production cycle and smaller harvested fish.
We parametrize the model and compare model predications to observed developments in the Norwegian industry. The behavior predicted by optimizing behavior under a maximum production regulation maps closely to actual industry developments since 2012. We endogenize the price of salmon and derive a counterfactual zero rent price to show how recent profitability developments can be explained by strong demand growth in the constrained production regime. Comparing the regulatory regime to the zero-rent unregulated counterfactual suggests large rent transfers to license owners. T he environmentally motivated regulations has largely subsidized producers.
Understanding regulatory rents in aquaculture is important for the social license of the industry. Environmental regulations that leads to wealth transfers to the industry can threated the social license of the industry . An extractive rent tax can be justified on the basis that regulatory rents should accrue to the state. However, it should be noted that regulatory rents are not equivalent to resource rents, such as naturally emerge in fisheries, petroleum and hydro sectors. R egulatory rents are temporary, and tax regimes need to be flexible enough to account for this so as to not damage the future competitiveness of the industry. R egulatory rents are vulnerable to capture by competing markets, consumer substitution and industry cost escalations.
References:
Parry, Ian W. H. 2004. "Are emissions permits regressive?" Journal of Environmental Economics and management 47 (2): 364-387.
Smith, Martin D. 2012. "The New Fisheries Economics: Incentives Across Many Margins." Annu. Rev. Resour. Econ. 4 (1): 379-402.
Squires, Dale. 2016. "Firm behavior under quantity controls: The theory of virtual quantities." Journal of Environmental Economics and Management 79: 70-86.