Economics of agro-food safety and international market for agro-food products and legislation Antonio Stasi

INDEX Market mechanism overview Market mechanism issues in details Consumers Consumer policy Firms Firm policies Market equilibrium and rents Rent reduction policies Market and role of the government The social optimum About market efficiency: market failures

Market mechanism overview DEMAND SIDE Market has incentives to provide some degree of food safety (reputation of firms for repeat purchase) Consumers cannot determine how safe is food before buying it Consumers usually discount food safety Consumers cannot determine whether a specific food was the source of illness or whether it could have other consequences in the future

Market mechanisms overview SUPPLY SIDE Food safety actions increase costs to firms Lack of information to consumers is an incentive to firms for keeping food safely low Labeled information about food safety could be a differentiation strategy for firm, which may ask higher price to consumers

Market mechanism overview SOCIETY Consumers reaction to food borne illness is stopping consuming products from a specific firm, or stopping consuming that specific type of product When consumers eat unsafe food and become ill, costs extend beyond consumers themselves but also to healthcare workers, employers, and family members consumers do not usually take into account those “social costs” when consuming food

Market mechanism overview GOVERNMENT Intervenes by increasing the level of welfare: Attempting to increase the level of food safety provided by the market Specify how process could reach certain levels of FS Specify the requirement products should meet before going on the market Allow firms selecting the less expensive technology

Market mechanism issues in details Regulations raise costs for firms Consumers are willing to pay more for safer food Firms could have difficult time communicating improved safety to consumers

Market mechanisms detail: consumers WTP refers to points obtained through a process of compensative variation = points at same utility level P WTP WTP>0…perceived as positive WTP<0…perceived as harmful Safer Food Provision

Market mechanisms detail: consumer policy WTP Informative campaigns for increased FS awareness Safer Food Provision Food Scares/Scandals/Outbreaks

Market mechanism details: firms P Marginal Costs More innovative technology Safer Food Provision

Market mechanism details: firms policies Marginal Costs Minimum Requirements Production Safer Food Provision

Market mechanism details: firms policies Marginal Costs Certifications and Labeling regulations Safer Food Provision

Market mechanisms detail: Market equilibrium and rents Perfect competition equilibrium P WTP Max Level of FS Marginal Costs Safer Food Provision

Market mechanisms detail: Market equilibrium and rents Perceived Safety P WTP RENT Actual Safety Marginal Costs Safer Food Provision

Market mechanisms detail: Rent reduction policies Informative Campaigns WTP Certification and labeling regulations RENT Marginal Costs Safer Food Provision

Market and role of the government Main Questions: In presence of food related risks… Does food market operate efficiently? Is the price paid by consumers “fair enough” in terms of level of risk? Is the discount to consumers, w respect to full safety products price, “acceptable” in terms of the level of risk? Is the social optimum reached or there is the need for government intervention? Social optimum: point at which the net economic value of the good in question is maximized

It is true when perfect competition assumption are verified The Social Optimum P Supply = marginal cost Social Optimum Demand = Marginal benefits Q It is true when perfect competition assumption are verified

About market efficiency: Market failures Externalities (Neg) Impact on human health (measurable in terms of disease related costs) => market below social optimum (Pos) Nutritional value Supply information Lack of info available to consumers. => consumers make sub-optimal decisions Claims, labeling, brand and price => trust

About market efficiency: Market failures Consumers’ decision making Lack of information on costs and benefit related to health consequence of a certain food product Consumers’ perception of the potential health effects on the food they choose (>risk perception <demand) Costs not always proportional to the risk because of long term effect on individuals’ health, which are neglected by consumers, or could be paid back by going to court Research, however, suggest consumers’ underestimate risks So they over-demand food and food risks are oversupplied

About market efficiency: Market failures Transaction costs Costs related to searching alternative products and assessing the level of risk (e.g. GMOs) Market competition Presence of corporations that gain rents

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