The Economics of Cost Recovery

The Economics of Cost Recovery

Doug Lipton, NOAA Senior Scientist for EconomicsNOAA Fisheries

Presentation to MAFACSeptember 24, 2014

OutlineGOAL: Provide a common framework and understanding of the concepts related to cost recovery to inform future discussions

Some Economic Theory Related to Cost Recovery

Cost Recovery Around the World

Cost Recovery – A State’s Example (MD)

U.S. Department of Commerce | National Oceanic and Atmospheric Administration | NOAA Fisheries |

The Cost of Fisheries Management. 2003. (edited by: W.E. Schrank, R. Aranson, and R. Hannesson). Ashgate. England. 302 pp.

• Part I Theory• The Cost of Fisheries Management• Fisheries Management Costs: Some Theoretical Implications• Financing Fisheries Management: Principles and Economic Implications

• Part II Country Studies• Management and Enforcement Costs in Norway’s Fisheries• The Cost of Fisheries Management in Eastern Canada: Newfoundland• Government Expenditures on Fisheries and Fisheries Management in Iceland• A Comparison of Fisheries Management Costs in Iceland, Norway and

Newfoundland• Fisheries Management Costs and Rent Extraction: Namibia• Fisheries Management Costs in Thai Marine Fisheries• Fisheries Management Costs: Concepts and Studies

• Part III Cost Recovery• The Effects of Unilateral Cost Recovery in an International Fishery• Cost Recovery in Fisheries Management: The Australian Experience• Cost Recovery in Fisheries Management: The New Zealand Experience

• Part IV Conclusions• Fisheries Management Costs: Findings and Challenges for Future Research


Costs for What (RME)?

• Research and analysis (e.g., cruises, data collection, stock assessments)

• Management implementation (e.g., Council deliberations, rule-making)

• Enforcement


Demand for Fisheries Research, Management and Enforcement (RME)

• While more research, management and enforcement adds value, it does so at a declining rate

• Value comes from increased industry profits or recreational benefits

Marginal Benefits $

QUANTITY (RME)


An Example of Benefits Created By Improved Management

Majority of NMFS’ protected species economic research is focused on commercial fisheries interactions. Example below highlights the economic gains from improved stock assessment information to the commercial fishery.

All survey information includes some amount of statistical error and uncertainty. We know that the more data we collect, the more precise our estimate will be, and the more confident we can be in setting regulations that balance fishing activity and species protection.

A recent NOAA Fisheries study found that a modest annual increase of $217,000 for data collection could improve the precision of Northwest Atlantic harbor porpoise stock assessment such that profits to commercial fishermen would increase by $850,000 per year.

The Benefit to the Nation is More Than Just Industry Profits

• The benefit to the nation is higher at any given amount of research, management or enforcement

• Value comes from increased industry profits, recreational benefits, seafood consumers, and people who desire well managed fisheries, protected resources and ecosystems

Marginal Benefit $

QUANTITY (RME)

IndustryNational

Adding in the Cost of Fisheries RME

• Optimal expenditures on fisheries management is where the marginal benefit from improved management = the marginal cost

Marginal Benefit $

QUANTITY (RME)

Marginal Cost $

National

Industry

Industry and NMFS Optimum Differ

• Industry COULD pay• Who pays doesn’t matter for efficiency

Marginal Benefit $

QUANTITY (RME)

Industry and NMFS Optimum Differ

• NMFS COULD pay• All the public + all or part of the private benefit

Marginal Benefit $

QUANTITY (RME)

Federal Budget is Constraining (Scenario 1 – Relatively High Budget)

• If the budget is constrained to here, industry is “happy”, but some of the public benefits are not realized

Marginal Benefit $

QUANTITY (RME)

High Budget Constraint $

Federal Budget is Constraining (Scenario 2 – Relatively Low Budget)

• Both industry and the public have “excess demand” for Fisheries RME

• High budget constraints become low budgets when budgets are static over time and inflation occurs

Marginal Benefit $

QUANTITY (RME)

Low Budget Constraint $


Cost Recovery: Efficiency and Equity• Efficiency – cost recovery provides an

opportunity to reduce “excess demand” so that expenditures on Fisheries RME are closer to optimum

• Equity – while traditionally (in both state and federal fisheries) taxpayers have paid most of the Fisheries RME bill, except for license fees, this is mostly a policy call. It is a transfer of income from taxpayers to fishers.


Mostly Policy: Some Practical Difficulties with Efficiency• Lack of agreement

• which RME programs should be included within the budget?

• Assignment of costs• General overhead• Assignment to sector

• Commercial or recreational or general public

• Multispecies, multipurpose research and data collection

• Fluctuating revenues from fees based on landing values


Cost Recovery in Catch Share Fisheries• Non-Catch Share Fisheries

• Race to Fish Dissipates Benefits Gained from Increased Expenditures on Fisheries RME

• In some non-quota managed fisheries (e.g., some state fisheries), increased cost-recovery can lead to reduced effort and thus, stock improvements

• Catch Share Fisheries• Improvements from Increased Fisheries RME

are Maintained, Value of Quota Shares Increase


Cost Recovery in Catch Share and Non-Catch Share Fisheries – Simple Example

w/o Catch Shares

Industry Profits

GovernmentFisheries RME Costs

Net Fisheries Benefit

Pre cost recovery

25 5 20

Post cost recovery

23 3 20

Catch Shares

Simultaneous cost recovery

40 3 37

Australia Experience• Australia Fisheries Management Authority - Began in 1980’s• Determine costs attributable to commercial, recreational,

foreign, etc.• Would the non-existence of a particular group eliminate the need for

the AFMA activity in question?

• Recoverable or Not?• The extent the user group benefits from the activity; • Consistency with Commonwealth government cost recovery policy in

other areas; • The existence of extenuating socio-economic considerations (i.e. such

as protecting the traditional way of life of some communities); • The existence of government policy which impacts on the cost

recoverability for a particular activity (i.e. there may have been policy decisions in the past that now influence the recoverability of a particular cost); and

• The cost effectiveness of recovering the costs of any particular activity.

• In 1999, 57% of costs recovered, 7% of landed value


New Zealand Experience• Cost Recovery Began in 1994• About 70% of RME costs recovered, or 8% of landed

value• Cost Recovery Principles:

• The Crown should pay for services provided in the general public interest;

• The cost of services provided to manage the harvesting of fisheries resources should be directed to those who benefit from harvesting the resource;

• The costs of services provided to avoid risk to the environment or its biological diversity should be directed to those who contribute to the risk.


Maryland Experience• Recreational License Fee Revenues >> Commercial Revenues;

Want Greater Recreational Allocations (e.g., striped bass)

• MD Department of Natural Resources Fishery Program Managers Assigned Budget (from license fees and general revenues) to Commercial, Recreational and Community Bins

• Confirmed That Recreational License Revenues and Disproportionate General Funds Were Subsidizing Commercial Fisheries Management Costs

• Result: Budget Realignment and Option for Commercial Industry To Cut Programs or Increase License Revenues. Industry Opted to Increase Revenues



Summing Up

• Optimal expenditures on fisheries management is when the marginal benefit from improved management = the marginal cost

• Budget constraints lead to excess demand for Fisheries RME

• Industry should be willing to pay, but in non-catch share fisheries, benefits are dissipated over time in the race to fish

• Hence, catch share fisheries tend to be where cost recovery is enacted

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The Economics of Cost Recovery

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