Implications of Entry Restrictions to Address Externalities in Aquaculture: The Case of Salmon Aquaculture

Abstract

This paper investigates production license management when regulation constrains the number of production licenses to address production externalities. This is increasingly relevant for aquaculture production where disease issues threaten future seafood supply. The regulatory problem is analyzed in the context of Norwegian salmon aquaculture where a stop in issuance of new production licenses has been implemented to address social costs of parasitic sea lice. Our theoretical model shows that restricting number of licenses raises prices and shifts production efforts excessively towards greater stocking of fish per license. Hence, the policy cannot achieve a first-best welfare-maximizing allocation. Furthermore, restricting entry by limiting number of licenses can create regulatory rents, which effectively subsides rather than tax the source of the externality.