Food Labeling - USDA Economic Research 1nov00

Food Labeling

USDA Economic Research 1nov00

http://www.ers.usda.gov/whatsnew/issues/labeling/ downloaded 09 Dec 2000

Introduction

In recent years, lawmakers have faced a number of food-labeling decisions, including initiatives concerning nutritional content, dolphin-safe tuna, organic products, country-of-origin, and biotech. Labeling decisions are increasingly going beyond addressing consumers' demand for information to include determining the appropriateness of labeling policy for achieving social objectives, such as improving human health and safety, mitigating environmental hazards, averting international trade disputes, or supporting domestic industries.

In response to interest in food labeling, including labeling to achieve wide social objectives, ERS is working on a study of the economics of food labeling. This forthcoming report will examine the economic theory behind food labeling and present five labeling case studies. The ERS report will show that the appropriate role for government, whether establishing mandatory labeling laws, providing services to enhance voluntary labeling, or not intervening at all, depends on the type of information involved and the level and distribution of the costs and benefits of providing that information. Furthermore, mandatory food-labeling requirements are best suited to alleviating problems that arise when consumers do not have adequate product information and are rarely effective in redressing environmental or other "spillovers" associated with food production and consumption.

Background

Consumers, firms, third-party entities, and governments all play a role in determining which of a food's many attributes are described on food labels. Consumers play a role through their consumption choices and political activities. The role of private firms, third party entities, and the government depends on the benefit-cost calculation relevant to each decisionmaker.

The costs and benefits relevant to a private firm's labeling decision are reflected in its balance sheet. Assuming that a firm attempts to maximize profits, it will add information to product packaging so long as each additional message generates more revenues than costs. Firms provide information on all positive attributes that merit the cost. Consumer skepticism, warranties, and competition among firms help to expose many negative attributes about products so that even in the absence of government intervention, a great deal of product information is revealed.

Firms are sometimes unable to convince consumers of the validity of labeled information. In these cases, the value of the label is diminished. Third-party services, including standard setting, testing, certification, and enforcement, could change the private, voluntary labeling decisions of firms by either reducing the costs or increasing the benefits of labeling. When these services bolster the credibility of voluntary labeling, they facilitate market transactions and increase market efficiency, in both domestic and international markets.

Third-party labeling services can be provided by a wide variety of entities including consumer groups, producer associations, private third-party entities, and international organizations. The government could also play a role in bolstering voluntary labeling by providing some or all of these services. Government-provided services could be funded through user fees or through specific or general taxes. In some cases, government support of voluntary labeling may be a more cost-effective way of delivering credible, relevant information to consumers than mandatory labeling requirements.

The government may decide, however, that some information must be labeled. Such a situation is most likely to occur when either the market does not supply enough information to allow consumers to make consumption choices mirroring their preferences (asymmetric information), or when individual consumption decisions affect social welfare in a way that is not reflected in the market (externalities). The costs and benefits relevant to the government's decision to intervene in labeling are broader than those of relevance to private firms. Benefits may include improved health or environmental quality. Costs may include the government's administrative costs, higher consumer prices, and industry compliance costs. The distribution of these costs and benefits may be as important in determining the desirability of the policy as the level of net benefits.

Even if the net benefits and distributional consequences of labeling are positive, labeling may not be the best policy option. The government has a number of policy tools at its disposal to correct for asymmetric information and to control externalities, including taxes, education programs, and production regulation. The literature suggests mandatory labeling is more likely to be appropriate when:

consumer preferences differ widely;
information is clear and concise;
the costs and benefits of consumption are borne by the consumer (no externalities);
information on product use is provided (such as warning labels);
standards, testing, certification and enforcement services can be established; and/or
there is a lack of political consensus on regulation.

Case Studies: Applying the Economic Theory

The case studies included in the ERS report are nutritional labeling, dolphin-safe tuna labeling, organic products labeling, country-of-origin labeling, and biotech labeling. Each case study examines the amount of information that was voluntarily supplied by private firms, the role of third-parties in enhancing the value of voluntary labeling, and the costs and benefits of government intervention in labeling. Each study involves different types of costs and benefits and different sets of political, legal, social, and scientific objectives and considerations.

All of the case studies illustrate that it is difficult to measure the costs and benefits of government labeling policy. Cost-benefit analyses for the case studies require quantifying such difficult notions as the benefits of a healthier population (nutrition labeling), fewer dolphin deaths (dolphin-safe tuna), and reductions in transaction costs (national organic standards). In every case, the task of actually measuring the costs and benefits of labeling involves difficult methodological and philosophical problems. The case studies also show the potentially far-reaching costs and benefits of labeling, including impacts on industry structure and on food quality and cost.

The case studies also illustrate that the impetus for government involvement in labeling may originate from many different sources including the government (nutrition labeling), consumer groups (dolphin-safe tuna and biotech) and producer groups (organic labeling and country-of-origin).

The nutrition labeling case study shows labeling is an effective policy tool when consumer preferences differ. Consumers have different concerns about nutrition. The standardized nutrition label provides a large amount of clear, concise nutrition information and allows consumers to make their own choices.

The dolphin-safe tuna and biotech cases illustrate the potential power of labeling as a middle ground in international trade disputes. In the dolphin-safe tuna case, labeling, but not banning, was acceptable under the General Agreement on Tariffs and Trade (for general information on the GATT, see http://www.ERS.USDA.gov/briefing/wto/links.htm). In contrast, international consensus on biotech regulation has been difficult to achieve, which may explain why labeling continues to be debated.

The dolphin-safe tuna and organic labeling cases illustrate the strong role that the Federal Government may play in setting standards, establishing certification, and providing enforcement mechanisms.

The country-of-origin example highlights the observation that private firms usually do not provide label information if it is not of value to consumers. In these cases, there is no reason for the government to establish mandatory labeling requirements. The example illustrates why any proposed government intervention in labeling decisions should arise from a demonstrated market failure.

The biotech labeling example illustrates three observations made in the theory section of the report. First, to establish successful mandatory labeling requirements the government must also provide or arrange for standards, testing, certification, and enforcement. Second, labeling of complex, unclear information will not reduce information and search costs. Third, labeling is not the best policy tool for redressing externalities.

For more information, contact Elise Golan, (202) 694-5424.

Introduction

Background

Case Studies: Applying the Economic Theory

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