Bad eggs and free market capitalism

How responsive is the free market to situations like the recent egg recall?

By , Guest blogger

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    In this July 1, 2010, file photo, eggs roll down a conveyor belt at Quality Egg of New England in Turner, Maine. A congressional committee is investigating possible egg contamination at three Maine farms, including this one, with ties to Jack DeCoster. The request follows a recall of 380 million eggs from an Iowa farm owned by DeCoster because of possible salmonella contamination. What roles should government and free market play in situations like the egg recall?
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The Recent Egg Recall List got me thinking about the quality of our food supply. We take it for granted that the food we buy will be high quality but how do we cost effectively maximize this probability? Do we need government and the Food and Drug Agency to be studying every egg before it is sold?

An economist who believes in the power of competition and accountability would say that "bad eggs" will quickly be discovered and that consumers will substitute away from farms that sell the bad eggs but how long will it take for the "bad guys" to be discovered? How quickly is such information aggregated on the web at a website that might be called http://www.badegg.com/? Standard and Poors and Moodys rank Wall Street companies, what private sector labels could continuously update their rankings of which farms are producing bad products?

If such a ratings agency existed, what would be its threshold line? If my farm sells 1 million eggs a year and I sell one bad egg, am I a "bad egg" firm? Now if 50% of my eggs are bad, then certainly but where is "the line" drawn?

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A libertarian would say that there is a market for eggs that can be differentiated on quality and price. Diverse households have different valuations over egg quality and the egg's price. Firms have different costs of producing an egg of a given quality. Some firms are able to produce such a high quality egg relatively cheaply while others can produce a large quantity of eggs at low price but some of these eggs will be infected. If a person purchases a cheap egg and gets sick, are they a victim or is this a lost gamble like the person who bets on the losing team in the Super Bowl?

A benevolent paternalist would say that competition and information updating are unlikely to be sufficient to protect consumers. Consumers may think they have identified a "free lunch" of a cheap egg that they assume is 0 risk.

If there is ex-post liability lawsuits against the egg farms, is this sufficient to incentivize them to better screen their eggs for risk and to take good care of their chickens to minimize such risk? Does ex-post litigation threats substitute for ex-ante regulation? If not, why not? Do the farms go bankrupt before the lawsuit comes to court?

Existing egg farms may also worry about spillover externalities. If my evil rival sells bad eggs, will consumers substitute away from his eggs AND my eggs and now drink beer for breakfast? If this logic is right, does this suggest that egg farms should be allowed to merge into mega-farms? The government would be better able to monitor these farms and the firm would internalize the product externality of selling a bad egg since its profits would fall. It appears that there is a tradeoff between monopoly power (and higher prices for consumers) and the quality and safety of products. How does the FDA trade of price versus quality? As we grow richer and our demand for high quality (i.e safe) eggs increase, does the FDA change its criteria for allowing mergers to take place? How does the FDA and FTC co-ordinate their efforts? The FDA wants a safe food supply while the FTC wants competition and little monopoly. In the egg case, are these goals in competition? Do the majority of the salmonella cases take place at the little guys or the "big egg" high volume producers?

How is confidence in a product (such as an egg) restored? A Bayesian would say that after a salmonella outbreak that we need to see a long streak with no more reports of public health problems.

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