Economics of food safety

1
Economics of food safety

• Lecture 36
• Economics of Food Markets
• Alan Matthews

2
Key question

• Do the benefits of growing food regulation
  outweigh their cost? Could we deliver a
  particular level of food safety more efficiently?
• Issues
• the market for food safety
• the rationale for public intervention
• types of intervention
• economic evaluation of interventions

3
Readings

• DEFRA 1999, Mitchell. Henson (just up to Section
  4)
• Antle, Crutchfield
• USDA ERS web resources

4
The market for food safety

• Assuming full information, the consumer demand
  for food safety is downward sloping
• The supply of food safety is upward sloping as
  the marginal cost of delivering additional units
  of food safety increases
• Policy implication is that attempting to achieve
  zero risk is misguided. Zero risk is rarely
  desired by individuals who are aware of the
  implications of their choices and have the pay
  the costs of achieving them.

5
The problem of imperfect information

• Quality characteristics such as food safety can
  be of three kinds
• Search characteristics quality can be
  ascertained by buyer at the time of purchase
• Experience characteristics quality can only be
  ascertained after purchase. Gives rise to the
  lemons problem familiar in the used car market.
  Food safety will be undersupplied.
• But market solutions may exist (if repeat
  purchases, supplier has incentive to invest in
  reputation)

6
The problem of imperfect information

• Quality characteristics
• Credence characteristics consumer will never be
  able to ascertain the quality on his or her own,
  but relies on the judgement of others
• Examples include the production process for a
  fruit (organic apples) or, in case of food
  safety, where there is a long time lag between
  ingestion and effect. Will be difficult for firms
  to establish reputations for quality.
• Government regulation may be justified
• Consumers may not be best judge of their
  interests when it comes to assessing risk

7
Externality arguments for public regulation

• On the production side, one rogue producer who
  fails to meet adequate food standards can put the
  reputation of an entire national food industry at
  risk
• On the consumption side, an infectious food-borne
  illness imposes wider costs on society that
  transcend those incurred by the individual
  consumer

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Systems of food safety control
Public Public Private Private
Direct regulation Product liability Self-regulation Certifica-tion
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Food standards
Degree of intervention Degree of intervention Degree of intervention Degree of intervention Degree of intervention
Information (labelling) Standards Standards Standards Prior approval
Information (labelling) Target Performance Specification Prior approval
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Evaluation of food safety interventions

• Literature associated with regulatory impact
  assessment based on benefit cost analysis
  initiated by Demsetz 1969 makes four points
• Market mechanisms can often be employed and these
  incentive-based approaches are more likely to
  allow consumers to choose the optimal level of
  food safety
• Regulations are justified only if they pass a
  benefit cost test issue of who should do this?

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Evaluation of food safety interventions

• Informed individual choice of food safety level
  is preferred to statutory safety standards when
  risk preferences are heterogeneous (T-bone steak,
  steak tartare, unpasteurised cheeses)
• Even when regulation is justified, the costs of
  regulation can be minimised by the appropriate
  design of regulation (performance standards
  preferred to specification standards)

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Benefit cost analysis

• Requires ability to measure the value of
  reductions in morbidity and mortality associated
  with consuming foods that could be contaminated
• For exporting countries, there may also be market
  benefits in terms of access to higher priced
  export markets

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Estimated annual costs in US of food-borne
pathogens
Source Henson, 2003
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Benefit cost analysis

• Several approaches to valuing health risks
• Cost of illness
• Willingness to pay (WTP) to avoid illness
• The value of a statistical life
• Contingent valuation studies to estimate WTP for
  food safety
• Distinction between tangible and intangible costs