Economics of food safety Lecture 36 Economics of Food Markets Alan Matthews

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

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

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.

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)

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

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

Systems of food safety control PublicPrivate Direct regulation Product liability Self- regulation Certifica- tion

Food standards Degree of intervention Information (labelling) StandardsPrior approval TargetPerformanceSpecification

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?

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)

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

Estimated annual costs in US of food-borne pathogens Source: Henson, 2003

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