ABSTRACT
This paper determines the conditions under which an individual transferable quota (ITQ) system will cause fishermen to engage in cost-decreasing, rather than cost-increasing, competition. If there are production externalities (e.g., congestion or stock externalities) present, the market price of a quota will not be fully reflected in these externalities. Thus, fishermen will not fully internalize the externalities in their effort decisions. Even if there are no production externalities, an individual fisherman imposes costs on others under open access by removing a fish that was available to all fishermen. An ITQ system allows the individual who values that fish most to obtain the right to harvest the fish, so each fisherman must internalize the full social cost. Thus, an ITQ system is capable of solving the common property externality but not the production externalities in a fishery.
