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The Role of Capacity Regulations in Compliance

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  • Production quotas can restore efficiency in industries characterized by production externalities, such as resource industries and industries with environmental regulations. However, with imperfect quota enforcement, firms may have incentives to build up excess capacity relative to their quotas. Firms with excess capacity may, in turn, have stronger incentives to violate quotas. We investigate the relationship between enforcement, compliance and capital levels in the short and long run. In the short run, excess capacity leads to increased illegal production but a well-functioning quota market may alleviate the problem. Furthermore, we show that the tougher the enforcement, the lower the firms' production capacity. With tradable quotas, the quota price strengthens the effect of tougher (or weaker) enforcement. At the aggregate level production quotas do not fully internalize the production externality when enforcement is imperfect. In such situations, additional management instruments are required to correct the firms' incentives to build up excess capacity, which exacerbate the non-compliance problem.
  • Keywords: Compliance, Enforcement, and the Lack Thereof Part I, Fisheries Management, Fisheries Economics
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  • Lazkano, I. & Nostbakken, L. The Role of Capacity Regulations in Compliance. In: Visible Possibilities: The Economics of Sustainable Fisheries, Aquaculture and Seafood Trade: Proceedings of the Sixteenth Biennial Conference of the International Institute of Fisheries Economics and Trade, July 16-20, Dar es Salaam, Tanzania. Edited by Ann L. Shriver. International Institute of Fisheries Economics and Trade (IIFET), Corvallis, 2012.
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  • AQUAFISH, USAID, NEPAD Planning and Coordination Agency, Norad, The World Bank, Hyatt Regency Dar es Salaam, NAAFE, World Wildlife Fund, United Nations University Fisheries Training Programme, ICEIDA, JICA, JIFRS, The European Association of Fisheries Economists, International Seafood Sustainability Foundation
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