Choose the statement about ITQs that is correct.

A.

The major problem with ITQs is that they create a monopoly.

B.

Fishers with low marginal cost sell ITQs to those with high marginal cost.

C.

The market price of a an ITQ equals the marginal social benefit minus the marginal social cost.

D.

When ITQs are used, no one has an incentive to cheat and exceed the quota.

D. When ITQs are used, no one has an incentive to cheat and exceed the quota.

Explanation:

As ITQs (individual transferable quotas) were initially created by the government to regulate an above all, social affair, which is related to the share in the total allowable catch of fish (species).

Since some of the fishermen have lower and some have higher marginal costs of "producing" fish, they trade ITQ's between themselves, with those who have high marginal costs selling ITQs to those that have low marginal costs. Also, the marginal private cost now becomes determined by the initial marginal private cost of the fish, plus the price of the ITQ. Then, it becomes known as the marginal social cost.

The equilibrium for the ITQ price is the difference between the marginal social benefit and the marginal cost. With the base marginal private cost becoming the marginal social cost, no one has the incentive to exceed the quota, as that would make the marginal cost go higher than the price, and the marginal profit lower. This notion creates the equality between self-interest and social interest.