Consumer Choice Policy

Julie A. Caswell, University of Massachusetts at Amherst

provide protection, and/or inform . Background Here we focus on policies that affect for all food quality attributes except safety. In Consumer choice policy is likely to take a more the United States, these policies are administered by prominent role in the agricultural and food sector in many federal agencies. For example, the U.S. the future as products become more differentiated Department of Agriculture administers product based on a variety of quality attributes. For example, standards and grades (e.g., grades for fresh fruits and a consumer might be looking for a frozen pizza that, vegetables), certification standards (e.g., for organic along with being safe to eat, is high in protein, products), and labeling requirements (e.g., nutritional contains grain that was not produced with the use of content for meat and meat-based products). The U.S. genetically modified organisms (GMOs), uses meat Food and Drug Administration also administers products from animals produced under specific product standards (e.g., standards of identity, conditions, and has environmentally friendly standards for package fill) and labeling requirements packaging. Another consumer might be looking for a (e.g., for nutritional content, use of product names). pizza that tastes good and is inexpensive. Figure 1 The Federal Commission oversees the suggests a range of quality attributes consumers may truthfulness of advertising and the fairness of selling care about. practices. Food product quality and variety are affected by There are several rationales for consumer choice company decisions and government regulations. policies. First, they may facilitate marketing. For Farmers, food processors, retailers, and food example, when quality grades are standardized, companies make choices such as seed variety or making transactions is easier. Second, these policies animal breed, processing technology, and packaging may assure that minimum quality standards are met that affect final product quality and presentation. At — providing protection to consumers from fraudulent the same time, government regulates many quality products. Third, they may protect consumers by attributes, product labeling, and advertising to assuring the truthfulness of information provided in facilitate marketing, assure particular quality levels, advertising or labeling. Fourth, they may facilitate Figure 1. Quality Attributes of Food Products consumer choice by requiring that particular types of information be provided allowing consumers to find 1. Food Safety Attributes products that better meet their needs. Foodborne Pathogens Consumer choice policies have two fundamental Heavy Metals and Toxins characteristics. First, they address situations where Pesticide or Drug Residues consumer information is thought to be absent or Soil and Water Contaminants inadequate. For example, nutrition labeling was Food Additives, Preservatives mandated in the United States because it was Physical Hazards Spoilage and Botulism believed that voluntary labeling was delivering Irradiation and Fumigation inadequate information to consumers. Second, while Other these policies are often focused on consumer choice, 2. Nutrition Attributes they tend to have marked effects on the entire Calories supply chain. As an example, organic certification Fat and Cholesterol Content and labeling standards affect , processing, Sodium and Minerals Carbohydrates and Fiber Content and practices as they attempt to deliver Protein uniform product quality and information at the Vitamins consumer end of the supply chain. Other The central challenge in choosing these policies 3. Sensory/Organoleptic Attributes is striking a balance between reliance on markets Taste and Tenderness Color and government regulation. Unregulated markets Appearance/Blemishes may be able to respond to changing consumer Freshness demand and other conditions more rapidly, Softness ultimately delivering more choice in products and Smell/Aroma quality levels to consumers at a lower cost. Other However, markets may fail to supply adequate 4. /Function Attributes Compositional Integrity information, resulting in consumers who are Size confused, misled, or who simply cannot locate or buy Style the products they want. Historically, policies have Preparation/Convenience been instituted on a case-by-case basis in response Package Materials to perceived needs for corrections as to how Keepability markets operate. Other 5. Process Attributes Consumer choice policies should be considered Animal Welfare in relation to alternative types of policies. For Authenticity of Process/Place of Origin example, a country might choose between banning Traceability the use of a particular technology (e.g., irradiation, Biotechnology/Biochemistry GMOs, or confinement animal production) and the Organic/Environmental Impact alternative of certifying and then labeling the Worker Safety Other presence or absence of the technology on final product packages. Use of consumer choice policies is gaining more attention as the process characteristics (how and where a product was produced) of food products and identity preservation become more important in domestic and international markets. work at cross-purposes. Policy choices should be cost effective and fit with overall policy goals. Issues Example: Should standards be the same or different for communicating the nutritional The design of consumer choice policy faces content of food products through labeling on several central issues: the package, advertising on television, and web sites on the Internet? How should these • When are policies and regulations needed? information policies be coordinated with other Should control of quality assurance and public health measures, such as education information provision be private or public? The programs, intended to reduce the incidence of information available to consumers when they obesity? make purchase decisions is never perfect nor do they always want to take the time to understand • What are the benefits and costs, and their and use the information that is available. incidence, of consumer choice policies? Overall, Companies have strong incentives to provide are the benefits of a policy greater than its costs? quality choices and information if consumers are These policies have effects up and down the willing to pay for them. They may also have supply chain. For example, certification incentives to provide low quality products and frequently requires actions at the production, inadequate information. To what extent can processing, and distribution levels. How evenly government improve the functioning of markets or unevenly are the impacts distributed across for food products through consumer choice companies, levels in the supply chain, and policies? consumers?

Example: Should government regulate the Example: How will a national standard affect content of functional foods and how they are the market for organic food products? presented to consumers? • Which consumer choice issues (e.g., which • When policies are adopted, should they be attributes) should receive priority for action given mandatory or voluntary? Mandatory approaches limited agency resources for this type of have the advantage of standardizing the entire regulation? Should government focus on market. However, they may impose consumer choice issues where public health may unnecessary costs on some market segments. be affected, where there is the greatest potential They may also prove unwieldy or restrict for consumer fraud, on “hot” issues where technological innovation in a fast changing significant segments of consumers demand market. Hybrid approaches are also possible action, or where companies request a government with programs being voluntary; but if a company program to facilitate marketing of their products? participates, they must meet standards set by There are limits on how much information policy regulations. can be used given the time consumers are willing to devote to food shopping. What are the Example: Should labeling of the presence or priorities given that attention itself is a limited absence of GMOs be mandatory or resource? voluntary? Example: Should standards be set for the • How should consumer choice policies be labeling of meat products regarding coordinated among themselves and in relation to production practices that may affect animal alternative policies? Policies may effectively welfare? reinforce each other, be duplicative, or actually • If policies focus on certification and labeling, how nutrition labeling by the Food and Drug Administration should information be delivered in different and the U.S. Department of Agriculture. Many consumer settings? Packaged products are programs serve multiple goals. For example, the relatively easy to label, but prepared foods recently issued national standard for organic products delivered in food service settings are not. is intended to provide consumer information as well as facilitate the marketing of organic products Example: Should restaurant and fast food throughout the supply chain. Given the breadth of deliver nutritional labeling comparable to that programs being considered, our discussion focuses on found on packaged foods? policy alternatives in broad terms.

• How do consumer choice policies affect • Maintain the status quo by continuing an ad hoc acceptance of food products? The existence of a approach to consumer choice policy. Under this government program may reassure consumers alternative, new consumer choice policies and and boost product acceptance. For product revisions to existing policies would be undertaken attributes that are or may be perceived to be by separate agencies based on Congressional negative, labeling may facilitate consumers mandates or their assessment of needs. This choosing not to use the product. approach allows a decentralized approach and development of multiple policy approaches. Example: Does labeling of GMOs help or However, it is not clear that the highest priority hinder their acceptance among consumers? issues will be addressed and that programs chosen will be those with the most favorable • How will consumer choice policies affect ratios of benefits to costs. international trade in food products? Will these policies improve the marketability of U.S. • Devise a coordinated approach to consumer products in foreign markets and the ability of choice policy. Under this alternative, existing and exporters to sell into the U.S. market? Trade proposed programs would be evaluated across agreements such as the WTO set standards for agencies and scrutinized based on their probable judging when such policies constitute unjustifiable benefits and costs. Priority would be given to nontariff trade barriers. those policies likely to have the greatest positive impact on consumer welfare. Attention could Example: Will compliance with U.S. organic also be focused on the distribution of benefits and standards affect entry of products into the costs across producers, processors, retailers, and European market? other participants in the food supply chain. Pursuing this approach would require significant management resources, and could stifle innovation among agencies. Policy Alternatives • Minimize use of consumer choice policy, relying and on market forces to determine the product Consequences variety, quality, and information offered to consumers. Where government institutes programs, make them voluntary on the part of Consumer choice policy, as defined here, is a companies. This policy would offer the greatest broad category ranging from case-by-case oversight flexibility to companies in responding to changes of advertising claims by the Federal Trade in market conditions and consumer demand. This Commission to broad mandatory programs such as approach assumes that the benefits of flexibility and fast adjustment outweigh the costs of potential or deception. Conclusions • Pursue a mixed strategy where mandatory information policies, such as labeling, are used in In general, consumer choice policies require circumstances where important public health, expenditures of resources, as do other policies. They consumer pocketbook, or other policy goals are at may enhance or restrict the ability of food producers, stake. Use no (or voluntary) programs where processors, retailers, and food service operators to issues are less important and/or the benefits and differentiate their products in the domestic market costs are less certain. This approach could be and to sell in international markets. Costs and profits effective in addressing significant information are likely to be affected. Government has to make problems, but it may be difficult to identify which expenditures to implement the policies. If well issues deserve action. designed, choice policies may protect consumers from substandard products and fraudulent claims, and • Resist demands for market facilitation services by facilitate their choice of products that best meet their government, relying on market forces for market needs. development. Depend on independent third Where regulatory action is demanded or desired parties to establish programs for standards, to alter market outcomes, consumer choice policies certification, and labeling. Under this approach, may be viewed as a straightforward means of taking programs are put to a market test. action. These policies are attractive in that they rely on market forces; they “simply” change the • Establish government programs to facilitate information environment in order to facilitate choice. markets in selected cases where benefits are Caution is required, however, because consumer clear or the possibility of fraud is highest. choice policies are multi-layered. For example, a Government may be able to play a useful role product-labeling program at retail requires standards where a neutral and trusted party is needed to (e.g., what is an organic product), certification (e.g., mediate market development. who will certify that standards are being met), and enforcement (e.g., who will certify the certifiers). In terms of consequences, consumer choice For these policies to affect market outcomes and policies are complex because of their possible effects consumer welfare also requires that consumers, or throughout the supply chain. The example of GMO others in the supply chain, pay attention to and act on labeling is instructive. Intended to inform consumers the information they provide. about GMO use, depending on its design, it can require product segregation in part or all of the supply chain. Farmers, processors, and distributors are likely References to incur extra costs but may also attain premiums or efficiencies that offset costs. and Consumers who care about GMO status get desired Suggested Readings information but those who do not pay for activities and labeling that they do not care about. Measuring the benefits and costs, and their incidence, of these Caswell, Julie A. 2000. Labeling Policy for GMOs: To policies is difficult. Each His Own? AgBioForum. Published by Illinois Missouri Biotechnology Alliance 3 (1/ Winter). (http://www.agbioforum.org/) Golan, Elise, Fred Kuchler, and Lorraine Mitchell (with contributions from Catherine Greene and Amber Jessup). 2000. The Economics of Food Labeling. Economic Research Service, U.S. Department of Agriculture. Agricultural Economic Report No. 793, December. Unnevehr, Laurian and Clare Hasler. 2000. Health Claims and Labeling Regulation: How Will Consumers Learn About Functional Foods? AgBioForum. Published by Illinois Missouri Biotechnology Alliance 3 (1/Winter). (http:// www.agbioforum.org/)