Mandatory vs. Voluntary Approaches to Food Safety

Agricultural and Food Policy, Food Consumption/Nutrition/Food Safety,

Risk-sharing and Liability in the Control of Stochastic Externalities

This paper analyzes alternative policies for controlling stochastic externalities, considering both the incentive and the risk-sharing effects of each. When polluter actions are unobservable so that regulation is not possible, alternative liability rules including zero, partial, and full liability are compared. When actions are observable, then regulation is possible, and the use of regulation is compared to the use of liability. The principal-agent paradigm provides the analytical approach used to determine the efficient policy choice. The effect of the availability of insurance is also addressed. This paper concludes with a discussion of the implications of the analysis for the control of stochastic marine pollution.Environmental Economics and Policy, Resource /Energy Economics and Policy, Risk and Uncertainty,

Voluntary vs. mandatory approaches to nonpoint pollution control: Complements or substitutes?

This paper develops a simple economic model of the interaction between a regulator and farmer that allows us to analyse the use of a policy that combines a voluntary, cost-sharing approach to improving water quality with a background threat of imposition of mandatory controls or taxes if the voluntary approach is unsuccessful in meeting a pre-specified water quality goal. In particular, we use the model to examine the conditions under which a welfare-maximising regulator would want to offer such a policy to farmers, and whether the regulator can use such a policy to induce cost-minimising abatement decisions without the need for farm-specific information about pollution-related characteristics that would be needed to implement first best mandatory policies (such as ambient taxes). We first consider the simpler case where there is a single farm in a given watershed. We then extend the analysis to consider multiple farms, and ask whether the policy can be designed to avoid free-riding in this context. The results suggest that, under a (credible) threat of imposition of a mandatory mechanism that will induce cost-minimising abatement decisions, the regulator can use a uniform subsidy rate (i.e., a rate that does not depend on farm characteristics) to induce participation in a voluntary program to achieve a given water quality goal. Thus, it is possible to induce first-best abatement decisions by heterogeneous farms without knowing farm-specific characteristics or tailoring the subsidy rate to the farm type. Whether a welfare-maximising regulator would want to establish a voluntary program of this type depends on the magnitude of the transactions costs associated with implementing a first-best mandatory instrument, the likelihood that a mandatory approach would be imposed if there is no voluntary approach or if a voluntary approach is unsuccessful, and the social cost of funds used to finance any subsidy that is paid for participation in a voluntary approach

IMPACTS OF INCREASED CLIMATE VARIABILITY ON THE PROFITABILITY OF MIDWEST AGRICULTURE

Approximate profit functions are estimated using time-series, cross-sectional, county level data for 12 midwest states. Measures of climate variability are included in the profit functions. Simulated impacts of climate changes on profits are derived. Results show that inclusion of measures of climate variation are important for measuring the impact of changes in mean temperature and precipitation levels. Failure to account for the impact of differences in variability leads to an overestimate of damages. If global warming increases diurnal variation, such increases would have negative impacts on the profitability of midwest agriculture.climate change, climate variability, Midwest, profit function, Farm Management,

PREVENTION AND TREATMENT IN FOOD SAFETY: AN ANALYSIS OF CONCEPTUAL ISSUES

Foodborne illness, damage functions, optimal regulation, Food Consumption/Nutrition/Food Safety,

RATIONAL ROOTS OF "IRRATIONAL" BEHAVIOR: NEW THEORIES OF ECONOMIC DECISION-MAKING

The neoclassical paradigm has proven to be a rich approach for evaluating a variety of issues for individual and social decision-making. However, an increasing body of literature suggests that actual behavior systematically violates the neoclassical utility model. This paper reviews a number of alternative models for decision-making. Results from the literature show several examples of apparently "irrational" behavior that can be explained in terms of these alternative motivations. The paper also extends the received literature by examining in some detail the implications of one such model which is based on the psychological feeling of ambivalence. The paper demonstrates that ambivalence has the potential for explaining the appearance of intransitive choices, the use of rules of thumb in decision-making and the large discrepancies between stated willingness-to-pay and willingness-to-accept, all of which have been observed in various settings. There are potentially great rewards from innovative research that expands the neoclassical paradigm to incorporate additional motivational factors in decision-making.Institutional and Behavioral Economics,

Nonpoint Pollution Control: Inducing First-best Outcomes through the Use of Threats

In this paper we develop a simple economic model to analyze the use of a policy that combines a voluntary approach to controlling nonpoint-source pollution with a background threat of an ambient tax if the voluntary approach is unsuccessful in meeting a pre-specified environmental goal. We first consider the case where the policy is applied to a single farmer, and then extend the analysis to the case where the policy is applied to a group of farmers. We show that in either case such a policy can induce cost-minimizing abatement without the need for farm-specific information. In this sense, the combined policy approach is not only more effective in protecting environmental quality than a pure voluntary approach (which does not ensure that water quality goals are met) but also less costly than a pure ambient tax approach (since it entails lower information costs). However, when the policy is applied to a group of farmers, we show that there is a potential tradeoff in the design of the policy. In this context, lowering the cutoff level of pollution used for determining total tax payments increases the likely effectiveness of the combined approach but also increases the potential for free riding. By setting the cutoff level equal to the target level of pollution, the regulator can eliminate free riding and ensure that cost-minimizing abatement is the unique Nash equilibrium under which the target is met voluntarily. However, this cutoff level also ensures that zero voluntary abatement is a Nash equilibrium. In addition, with this cutoff level the equilibrium under which the target is met voluntarily will not strictly dominate the equilibrium under which it is not. We show that all results still hold if the background threat instead takes the form of reducing government subsidies if a pre-specified environmental goal is not met

Voluntary approaches to environmental protection: The role of legislative threats

Recently, attention has turned to the use of voluntary agreements between regulators and polluters as an alternative to mandatory approaches based on regulation or legislation. Voluntary agreements have the potential to reduce compliance costs by allowing greater flexibility and to reduce administrative and other costs. The purpose of this paper is to provide an economic model of the use of voluntary agreements where participation is induced through a background legislative threat. The goal is to determine whether a voluntary agreement is likely to be the outcome of the interaction between regulators and polluters, and the role that the legislative threat plays in determining that outcome. We consider first a model with a single firm and then extend the analysis to consider multiple firms. In the context of the single firm, we show that a mutually beneficial voluntary agreement always exists, but that the resulting level of abatement depends on the probability that legislation will be imposed. For the case of multiple firms, we examine the potential incentives for free-riding and ask how the terms of the agreement can affect these incentives. The results suggest that an increase in the magnitude of the threat (i.e., an increase in the probability that legislation would be imposed if a voluntary agreement is not reached) will generally increase the level of abatement under a voluntary agreement, and that if the probability of legislation is large enough, a first-best level of abatement is possible (though not guaranteed). In the context of multiple firms, the potential for free-riding can reduce the likelihood that a voluntary agreement will be reached

Voluntary agreements with industries: Participation incentives with industry-wide targets

We develop a multiple-firm model of an industry's voluntary adoption of environmental protection measures to achieve a predetermined industry-wide emissions reduction target under an explicit threat of imposition of an emissions tax. We examine the free-riding incentive of individual firms and its impact on the viability of a voluntary approach to pollution control (VA). We find that despite the free-riding problem, there is an incentive for a sub-group of firms in an industry to participate in a VA. There always exists an equilibrium VA with at least one firm participating. A VA is strictly preferred by firms and an industry as a whole, although it is cost inefficient from society's point of view. However, if a VA can save transaction costs significantly relative to an emissions tax, it could still be socially preferred. Finally we show that the free-riding problem does not necessarily get worse with an increase in industry size. However, the cost saving to the industry and the loss to the society (excluding transaction costs) increase with the size of an industry

Do Exposure Suits Produce a \u27Race to File\u27? An Economic Analysis of a Tort for Risk

Conventional tort law does not allow victims of exposure to a toxic substance to seek compensation until they develop actual symptoms of illness. This may effectively bar recovery because at the time the illness arises, injurers may be judgment proof. One possible response is to allow a tort for risk that allows victims to seek expected damages at the time of exposure. However, critics charge that this could create a \u27race to file\u27 wherein victims rush to file suit to ensure that they will get a share of the injurer\u27s limited assets. We show that such a race may or may not occur in equilibrium, and that when it does occur, not all victims choose to file at exposure if bankruptcy is an inevitable result. If bankruptcy is not inevitable, it is possible that a tort for risk will trigger bankruptcy, although a no-bankruptcy equilibrium always exists and Paretodominates the bankruptcy equilibrium. We examine the consequences of the various tort-for-risk equilibria on the compensation of exposure victims, litigation costs, and injurer care