EFTA member countries considering membership of the European Community in the run-up to 1992 must weigh the benefits of freer trade, increased economies of scale and competition and potentially huge dynamic growth effects against the costs of reduced sovereignty over economic and social affairs. Iceland has always viewed the EC requirement of other members' free access to its limited fish resources as an insurmountable obstacle to Community membership, but there is now an increasing awareness of the potentially detrimental consequences of remaining outside if most other EFTA members join.

In Discussion Paper No. 530, Research Fellow Thorvaldur Gylfason notes that overfishing has been a serious concern in Iceland (and Norway) for many years. The Icelandic fishing fleet has expanded by a factor of 17 since the 1940s, while fish stocks have declined by between one-third and one-half since the mid-1950s. The government now allocates permits free of charge to individual ships, which are traded domestically. (No such trading is permitted in Norway.) Proposals to improve the industry's efficiency by selling such quotas in auction markets ex ante or taxing them ex post have met vehement and unsurprising opposition from the industry.

Gylfason notes that the sale or taxation of quotas would have major macroeconomic implications, however, since it would enable the government either to abolish both personal and corporate income taxes or significantly to reduce and perhaps eliminate the public sector deficits that have been a major cause of Iceland's persistent inflation for the last 20 years. Moreover, since the Community's regulations require equal access for all members to each others' markets, not resources, Iceland (and Norway) could join the Community by allowing free intra-EC trade in such permits. Although this is a politically sensitive matter, other member countries would be hard pressed to compete successfully in a free market for Icelandic fishing permits, since the aggregate productivity of labour and capital in the Icelandic fishing industry has consistently been well above the Community average. Since the exploitation of Iceland's limited fish resources would then remain primarily in domestic hands, this measure could remove the main hindrance to its membership of the Community without any substantial cost.

Gylfason notes in conclusion that such common access problems arising from the absence of private property rights are also important for several other European countries with industries that exploit common property resources with substantial externalities. Similar market solutions may be applied to such diverse problems as oil extraction, forestry, environmental pollution and traffic congestion.

Iceland on the Outskirts of Europe: The Common Property Resource Problem
Thorvaldur Gylfason

Discussion Paper No. 530, April 1991 (IT)