Gosnell Lecture Series | "Strategic under production and ownership limits in quantity-based regulation"
Abstract: Quantity-based regulations, e.g., tradeable production or pollution emissions permits, can function as a credible commitment device that enables firms to strategically under-produce the aggregate production target that is set by a regulator. This strategic underproduction increases industry profits but lowers consumer surplus and cost efficiency. Strategic underproduction is prevented by setting a limit on the quantity of permits that can be owned by individual firms. Ownership limits that are too stringent or too lax however reduce welfare below the levels that obtain when no ownership limits are imposed. We contrast welfare maximizing ownership limits with those currently in place in the U.S. west coast groundfish fishery. Ownership limits currently range between 2\%-5\% of total permits issued depending on the fish species. The welfare maximizing limits that we derive are in the range of 10\% - 50\% of their respective species’ quotas. Evidence finds current ownership limits prevent groundfish producers from exploiting returns to scale in production. Our results offers new directions for eliminating market power inefficiency in the groundfish fishery and in CAT-regulated industries broadly.
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