he idiocy and inefficiency of the European Union's Common Agricultural Policy is well-known and well-documented. A less well know offshoot is the Common Fisheries Policy which is just a perverse in the effects that it has on the market, fishermen and fish stocks. The setting of new quotas by the EU over the weekend has been hailed as a major reform of the CFP. It's anything but. In true EU fashion, the real source of the problem has been left unaddressed while lots of tax payer money is still being distributed freely. The immediate problem is that fish stocks are becoming seriously depleted. In the case of cod, it's now in danger of becoming extinct in EU waters.

How did it ever get to this point? Two things are to blame. First, the fish stocks have been treated as common property, and secondly the EU's subsidies have been encouraging fishermen to fish more. Treating the fish stocks as common property means that nobody owns the fish, which in turn means that whoever fishes most gets the maximum benefit. Even if individual fishermen wanted to conserve fish stocks and were to fish less, this would simply mean a bigger catch for the more aggressive fishermen. There is no incentive whatsoever in a common property system to conserve: a classic case of the tragedy of the commons. Abolishing individual property eradicates the incentive to make good use of common property. Of course, nobody used to "own" the fish stocks in the past, but the amount of fish was so large relative to the harvesting capacity that it did not matter. With the introduction of modern, highly efficient fishing techniques the balance has shifted to the point where fish stocks are no longer a de facto infinite resource. On top of this comes the second problem, which is the EU's subsidy program. Some of the subsidies the EU disburses are specifically targeted for increasing capacity by modernizing the fleet. At the same time, the EU is also subsidizing the removal of capacity because there's already too much of it. It's the worst of all worlds: not only are fish stocks common property, the EU is encouraging capacity expansion and then paying others to reduce capacity.

This is of course completely ridiculous, but that has never stopped the EU before. The current system is not only tremendously wasteful, it also generates a lot of ill will on the part of the fishermen, who are dependent on whatever the EU decides in terms of quotas and subsidies. Cutting back on quotas and stopping any further capacity-enhancing subsidies, as decided this weekend, is hardly a serious reform of the system. The solution to the problem is known and workable, but there is no political will to implement it, as European politicians are far too fond of their roles as Wise Regulators and Santa Claus.

The solution for the first problem of common property is to assign property rights to fishermen in the form of Individual Transferable Quotas, or ITQs.These are already in use in various parts of the world, such as the Chile, Canada, the US and Iceland. The ITQ system allows fishermen to buy and sell a quota of the Total Allowed Catch (TAC) at a market price. The TAC is determined by looking at how depleted the fisheries are and is adjusted accordingly. The ITQs the fishermen buy make them owners of a share of the TAC, which also gives them a vested interest in maximizing the value of their ITQs, which is not the same as maximizing the TAC. This actually aligns the interests of the fishermen with those of conservation as fishermen will want to preserve the market value of their ITQs. If the TAC is set too high, this will reduce the prospects for future TACs, which in turns means fewer fish to be caught per ITQ. The situation now is that fishermen only take the amount of fish they can catch now into account, so it is always in their interest to have as large a TAC as possible, which leads to horrible overfishing. Introducing a market mechanism based on property rights is the way to create a self-sustaining fishing industry. This is not just idle theoretical speculation. The report linked to above lists the experiences with ITQ systems, and in virtually every instance these effects have been seen. Instead of arguing for higher TACs every year, the fishermen have become interested in conservation too, because it affects the capital that's tied up in the ITQs.

The second part of the problem is the subsidies. The solution there is simple: abolish them. The effects of subsidies are negative in all realistic scenarios. Subsidies result in lower equilibrium biomass (i.e. fewer fish) with lower profits and higher effort. It's a loss all round. But this study assumes that there is some form of a market mechanism at work, which will reduce harvesting capacity when profits are low or negative. Due to the market-distorting policies of the EU, the situation is even worse because overfishing has been allowed to go on for so long, and losses have been compensated by increased flows of money from Brussels. Right now most of the European fisheries industries are in a situation where subsidies have a short-term positive effect on fishermen's profitability at a long-term cost.

So by moving to a property-based system of ITQs the recurring whining and moaning of the fishermen and the posturing of politicians can be eliminated. Fish stocks will be preserved, a profitable and self-sustaining industry will be created. Most importantly of all, it will give to fishermen hope for the future by allowing them to work as entrepreneurs in a business. Some will fail, others will prosper. But they no longer will be supplicants living on welfare.