Taxes vs. Quotas for Regulating Fisheries Under Uncertainty: A Hybrid Discrete-Time Continuous-Time Model

There is a wide variety of regulatory instruments available for achieving economic efficiency in markets where externalities exist. All of them, when correctly designed, are equally effective, provided that complete information is available and that adjustments to the level of the instruments can be made costlessly. However, with the presence of uncertainty, it is well known that one instrument or another may produce a higher expected present value of net social benefits than the others. How uncertainty affects the choice of instrument specifically in fishery management and in other dynamic optimization settings is less well known. A combination discrete-time and continuous-time stochastic model of a dynamic fishery is used to compare the relative performance of a per unit tax and a quota in this paper. The analysis confirms the conclusion reached in the general literature on optimal instrument choice under uncertainty: which instrument performs most efficiently depends on the specific fishery being regulated.