Assurance of food safety is problematic because of uncertainties in detection, untraceability of source, and scientific ignorance about the relationships between cause and effect. Thus, market failures abound in the economics of food quality. In recent years, food safety has assumed greater prominence in the policy arena. Advances in biological and engineering disciplines have increased the technical and economic feasibility of interventions that can protect food quality as it passes through production, processing, and distribution. Regulators seeking to remedy market failures should, with some confidence, a) quantify the net social benefit of quality food and how it relates to actions taken, b) quantify the net private benefit of quality food to food industry entrepreneurs and how it relates to actions taken, and c) design regulations to increase net social benefits by encouraging alterations in private actions. Downstream processors faced with upstream externalities will seek to a) relate their profitability to actions taken upstream, b) understand the relationship between upstream actions and upstream profitability, and c) design incentive mechanisms to facilitate congruence between downstream profitability and the goals of upstream food suppliers.

The aim of this paper is to determine privately optimal intervention strategies to maintain product quality in the presence of both regulatory and market incentives, and so provide a better understanding of the problems facing the regulator and downstream processor in directing actions to maximize overall economic surplus. Problems to which the model might be applied include cleaning routines in packing houses and restaurants, and pest control strategies for stored food commodities.

To meet our goals we develop a biology-driven microeconomic model of the private cost of food contamination. Although the model is developed with reference to specific food quality examples, it is robust to a large number of disparate production environments. During the time taken for food to pass through to the point of consumption it is exposed to pathogen contamination. Contaminations occur in a random manner, and uncontrolled pathogens often grow at an exponential rate. Applying simple statistical methods to accommodate these stylized biological facts, we develop expressions for the private economic cost of uncontrolled contamination as a function of time. A costly means of control is then introduced into the model. The effects of the control on private economic cost depend upon the production environment. For example, pathogen damage can sometimes be eradicated by application of the control whereas at other times the control can just eliminate the potential for further damage. For different production environments, the privately optimal number of interventions (i.e., controlling actions) is studied as a function of biological and control cost parameters.

The model is then applied to policy design problems. Regulatory agencies may seek to influence private actions by checking quality just before end use, or at other points in the transformation process. These quality checks may be conducted in a deterministic or a random manner, and several plausible penalty structures for substandard quality can be postulated. We complete our formal model presentation by studying the effects of some candidate regulations on private actions.

To validate the analysis, we apply the model to the control of the lesser grain borer in Kansas stored wheat. We adapt our model to determine the optimal number of interventions given representative cost and biological parameters. Our conclusions concerning the optimal number of control treatments given existing price penalties for insect damaged kernels are consistent with decisions made in practice. We also examine the effects of random inspections when there are regulatory and market price penalties for violations of threshold quality levels.

¹John A. Fox is an assistant professor at the Department of Agricultural Economics, Kansas State University, Manhattan. David A. Hennessy is an assistant professor at the Department of Economics, Iowa State University, Ames. Senior authorship is not assigned. Hennessy is the corresponding author, and can be contacted at: Phone (515) 294-6740, Fax (515) 294-0221, e-mail hennessy@iastate.edu. Journal paper No. JB17679 of the Iowa Agriculture and Home Economics Experiment Station, Ames, Iowa, Project No. 3463, and supported by Hatch Act and State of Iowa Funds.

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