An Economic Assessment of Food Safety Regulations

Market-Oriented Approaches to Food Safety:

Economic Incentives

As discussed earlier, food safety problems flow from

market failure due to lack of consumer information about

food safety and from few incentives for private producers

to provide this information.  One possible approach to

correcting this market failure would be to strengthen

market mechanisms for promoting safer food.  For

example, property rights to safe food and product liability

could provide a strong incentive for producing safe food.

A case in point is how the British Food Safety Act of 1990

changed the domestic and international food safety

relationships among producers, retailers, and traders

(Hobbs and Kerr, 1992).  This statute changed the liability

laws for companies selling in the UK by adding a “due

diligence” defense clause.  Food firms can protect

themselves from liability by increasing compliance

monitoring and by increasing vertical quality control.

However, Viscusi (1989) argues that tort liability cannot

provide the economic incentives necessary to reach the

optimal level of health and safety because of the high

information requirements for documenting liability suits.

Establishing a cause-and-effect relationship among

illness, food product, and producer remains problematic.

Still, HACCP could provide economic incentives that

either augment or substitute for incentives found in the

private marketplace and other regulatory programs.

Pathogen reduction was a prominent issue in the meat

industry prior to the HACCP regulations.  Public outrage

over the 1993 

E. coli O157:H7 outbreak motivated the

beef industry to increase research on pathogen control.

Klepper (1996) stresses the importance of demand

factors “in shaping the rate and direction of technological

change” (p. 563).

Foodservice companies and restaurant chains (institu-

tional markets) have strong economic incentives to avoid

publicized outbreaks, product liability suits, and brand

image deterioration.  Lower pathogen levels provide

other benefits, such as less product spoilage, longer

shelf life, access to more distant markets, and fewer

customer complaints about product quality.

U.S. companies with internationally recognized HACCP

programs will be more competitive.  The 1996 Russian

ban on U.S. chicken because of alleged food safety

concerns illustrates potential market losses.  Other

countries expect that pathogen control will expand their

export markets (Roberts et al., in press).  For example,

New Zealand has a HACCP program for sheep slaugh-

ter, largely to protect its export market.  Similarly, the

Dutch Government and food industry instituted an

Integrated Quality Control system for slaughter pigs to

regain its export market.

HACCP will likely improve economic incentives for

innovation, by clarifying firms’ responsibility for food

safety, by setting public health targets, and by removing

regulatory obstacles.   New and affordable tests are

improving pathogen monitoring and are permitting new

production options, thus expanding production opportuni-

ties.  An incentive to develop new technology is the first-

mover advantage, whereby the first firm that markets a

safer product will gain new markets and increase market

share (Porter, 1983).  If producers were able to prove

claims of food safety through verification and testing,

then certain products could develop a reputation for

safety.  Labeling foods or establishing brands with a

reputation for safety would allow firms to capture some of

the consumer demand for safer food.

As an example, certification by FSIS’s Technology

Assessment and Research Coordination Division that a

production process significantly reduces pathogens

reduces the purchaser's cost of information about safety

performance.  Processors’ legal liability decreases

because they are using the best pathogen reduction

processes for meat and poultry slaughter and process-

ing.  And, it enables equipment purchasers to advertise

foods as produced using the latest pathogen-reducing

technology.

New technologies are becoming available that producers

can adopt to reduce pathogen incidence in slaughter

plants, and the new HACCP pathogen reduction rules

may accelerate adoption of these technologies.  In

December 1995, Frigoscandia’s steam pasteurization

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Economic Research Service/USDA

An Economic Assessment of Food Safety Regulations

process became the first process to receive FSIS

approval for significantly reducing pathogens.  Before

sides of beef go into the chiller, they are treated with

steam to kill pathogens.  A large unit can process 410

head/hour, is fully automated, and costs about $750,000.

Frigoscandia has installed it in Excel/Cargill’s large plants

and another 60 units have been ordered by U.S. and

international firms.  Capital costs are minimal in a large

plant and less than a half a cent/pound of beef in the

smallest plants.  Other options include increased hand

trimming for lots with high pathogen counts, steam

vacuums on the kill line in the plants, and chemical

dehairing of animals.  As firms respond to the new rules,

we may see different plants adopting different methods

to achieve pathogen reduction.

As with education and labeling, market-based incentives

for safer food may prove a useful addition to regulatory

efforts to promote food safety.   As market trends lead to

more consolidation and vertical integration in the food

sector, we can expect more efforts by firms to use food

safety as a marketing opportunity.