Spatial Externalities in Salmon Aquaculture: Salmon lice management in Norway

Salmon aquaculture is constrained by the proliferation of salmon lice, a natural seawater parasite that benefits from the agglomeration of production. The lice challenge currently costs the Norwegian salmon farming industry above 450 million USD per year (0.5 USD/kilo). Adjacent farms impose a contamination externality on each other, which they do not fully internalize unless they are under joint management. Spatially fragmented ownership thus poses a challenge for optimal lice management. The complexity of spatial contamination patterns due to variation in currents, tides, and farm locations further complicates this. A spatial market failure generally requires a spatial policy response. This paper reviews the economic literature on spatial externalities to provide possible solutions for lice management in the salmon farming industry. The focus is on edge effects; spatial externalities that vary in intensity with distance from an emitting source. The existing literature on salmon is mostly concerned with the impact on wild salmon populations, while it gives little attention to intra-industry (mis)coordination. The literature on forestry and agriculture, however, covers cross-contamination between adjacent locations under fragmented ownership extensively. The contribution of this paper is to identify key lessons from other spatial resource management problems, and adapt them for the case of salmon aquaculture. Norway is already considering lice control policies with spatial components such as barrier zones similar to forest fire prevention. The main implication for the industry is that regulations will focus more on the location of farms and may change the geography of the salmon farming industry.