BOX 5.1 The Zero-Revenue Auction

Although auctions have many desirable allocation characteristics, their use has been limited by the reluctance of resource users to pay for the resources they use. One mechanism that has successfully circumvented this barrier is the zero-revenue auction. It is currently used in the Clean Air Act's Acid Rain Program to control sulfur emissions.

After an initial allocation of IFQ shares based on historic catch or some other criterion, under a zero-revenue auction the government would take back some proportion of the allocation each year (approximately 3% in the sulfur allowance program) for sale in an auction. Quota holders are allowed to buy back the quota they put up to bid, but they will succeed only if they are the highest bidder. Revenue is returned to the holders of the auctioned quota shares. In principle, the auction could involve either quota shares (e.g., 0.5% of TAC) or annual quota (e.g., pounds of fish in 1999). Significantly, all components of auction transactions (e.g., price, identification of buyers, quantities transacted) are public information. Privately arranged transfers could also take place any time among eligible participants as long as the control authority was notified and the transfer was approved.

A zero-revenue auction could improve an IFQ program in several ways. First. it provides excellent information about prices, which is helpful not only to fishermen in planning their investments, but also to bankers as they seek to value this uncommon form of collateral. Public information about prices also serves to facilitate private trades outside the auction. Second, the zero-revenue auction guarantees the steady flow of IFQs in the market, ensuring that potential entrants are not precluded from fishing.

Random or Equal Opportunity Mechanisms. A good example of such mechanisms is provided by the people of Bikini, in the Marshall Islands, when they were removed to Rongerik after the U.S. hydrogen bomb tests. Food resources proved to be inadequate on Rongerik. Under their chief, the people pooled their harvests, and the chief divided the pool into equal shares per person.

A common random mechanism that may be used for the initial allocation of quota is the lottery. Lotteries may be structured in a variety of ways, but their essential feature is randomness. A person is randomly selected from a pool of participants to receive a good. Lotteries may be particularly useful when the demand for a good is greater than the supply and it is not desirable to allocate the scarce good on the basis of price.

Lotteries, unlike auctions, do not allocate quota to their highest-valued uses. Rather, lotteries promote equality (but not necessarily fairness) by treating all participants alike. Each participant is equally likely to receive valued goods. Lotteries may be an appropriate mechanism for allocating IFQs to new entrants. If there are more entrants than quota available, and if removing price barriers to entry is an important consideration, lotteries can be a fair allocation mechanism.

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