February 2009

Not really unexpected.  Hartford Insurance, however, has $12,000,000 per policy period – perhaps as much $40,000,000 total to cover claims of victims of this tragedy.  Also, manufacturers like Kellogg and King Nut are morally and legally responsible for the products they manufactured and sold.

In the ongoing political (and legal, and historical, and economic) arguments about the regulation of social and economic activity by governments and government agencies, one of the dominant theoretical controversies has been over the answer to this question: Do regulations “interfere” with the market-place by creating unnecessary inefficiencies and higher costs, or are regulations a necessary corrective for the inevitable “failures” of an unregulated (or “free”) market? While this controversy remains justifiably open in the context of the markets for many products and services—e.g., transportation and energy, there is no rational justification for an argument in favor of a “free” market for food.

To begin with, there is no such thing as a “free” market for food because such a market is defined by an almost perfect asymmetry of information. In other words, when it comes to the safety of the food being considered for purchase, the manufacturer and seller knows the relative care that went into production, but the buyer purchases the product based mostly on trust. The inability of consumers to discern the relative safety of their food purchases limits all but a generalized demand for safer food. This is because:

For the most part, food safety is a credence attribute, meaning the consumers cannot evaluate the existence or quality of the attribute before purchase, or even after they have consumed [it].

This generalized demand for safer food, which is applicable to an entire industry or product-category, is thus ineffective in causing the market to enhance food safety. As a result, there is little economic incentive for producers to manufacture food that is safer than that which is required by government regulations. Such regulations therefore tend to act as a ceiling not a floor, and effectively suppress most competition in the realm of food safety. In economic terms, the regulations thus act as a “negative incentive” that prompts a manufacturer to invest what is necessary to avoid non-compliance, but nothing more.

In the case of the Peanut Corporation of America (PCA), you can perfectly see this dynamic in work. Faced with infrequent and ineffective inspections, PCA was free to do what it wanted in its pursuit of higher profits. This included, according this week’s article in the New York Times, Michael Moss, Peanut Case Shows Holes in Safety Net, Feb. 9, 2009.Continue Reading Guest Blog – Denis W. Stearns – “THE MARKET FOR PEANUTS: WHY FOOD IN THE U.S. MAY NEVER BE SAFE”