In The Labeling Problem, I explained how the presence of a label, whether on a college course or a food item, does more than just identify the product. It actually can influence consumers’ perceptions about the attribute the label identifies. As a result, it can also influence consumers’ perceptions of similar products that don’t have the label.
Consequently, labels have the potential not just to inform consumers, but to misinform them; particularly when the label is for an attribute that consumers do not fully understand. For instance, with genetically modified (GM), or genetically engineered (GE), food products.
There is another dimension of the labeling issue that I promised to return to: what makes economic sense? Remember the Three Simple Rules? What makes economic sense comes down to this: What’s the marginal benefit of providing the additional information? What’s the marginal cost of providing that information? And because we’re talking about a diverse set of consumers with different interests, that leads to the question of “who should pay for it?”
So What’s the Marginal Benefit?
Information is economically valuable only if it will change the outcome of a decision. Consequently, a GM label would create personal (or private) benefit only if the label would change the consumer’s decision to purchase the product. A Pew Foundation study found only 1-in-6 people (16%) “care a great deal about the issue of GM foods.” Another 37% “care some.” But do they care enough that it would make them willing to change their behavior even if it cost them additional money to buy the GMO-free product? Some scholars have attempted to estimate consumers’ willingness-to-pay (WTP) for GMO-free products as a measure of the value of labels (for instance, see here and here). The results tend to show individual consumers, on average, are willing to pay at least a little more for GMO-free products, whether the label denotes the presence–or the absence–of GMOs. Of course, this is also based on the fact that a large percentage of consumers lack knowledge about what GMOs are.
From a public policy perspective, the label only has value if it would lead consumers to make decisions that improve public well-being. The consensus of the scientific community is that there is no substantive nutritional, quality. or health safety difference between food containing GM ingredients and GMO-free foods (see here, here, and here). That suggests that there is no real public benefit to having the information provided.
What’s the Marginal Cost?
A wide range of numbers have been thrown around about the potential cost of mandatory labeling. At the low end, the Consumers Union (a pro-labeling group) commissioned a study that found the cost would be only $2.30 per person (or about $740 million) per year. That estimate is based primarily on the costs of labeling itself. It does not include costs of regulatory enforcement or increased costs in sourcing inputs, keeping the inputs segregated to prevent contamination by GM inputs, and product reformulation. Other studies (funded by anti-labeling groups) have suggested costs on the order of $450 per household (or about $56.7 billion) per year. In addition to including a more systemic view of the costs, these studies also make assumptions about manufacturers shifting more of their products to being GMO-free to avoid the negative stigma of having a “contains GMOS” label.
So while the predicted cost is wide-ranging, one thing is clear: The costs are bigger than zero.
Sound economic decision making (and therefore sound policy) requires the marginal benefits of any action to be at least as big as the marginal costs of the action. From a public perspective, the benefits are arguably zero, while the costs are greater than zero. That suggests a regulation requiring labels would not make economic sense.
Does that mean there should be no labels? Not at all. It simply means it doesn’t make sense to have a law that forces all consumers (many of whom are not concerned about GMOs anyhow) to pay for a regulation that has little or no public benefit in the first place.
But the fact that there are potential private benefits to labeling suggest that voluntary labeling may be desirable. Clearly, the value of labeling information to some consumers is greater than zero. And some of those consumers would both pay for that information and change their consumption decision based on it. Manufacturers who believe they can deliver that value at a low enough cost to make a profit on it have every incentive to make that happen. And in fact, that’s exactly the situation we have now in the US with voluntary “GMO-Free” and/or “Organic” labeling.
One might still object that these voluntary labels may create a negative stigma about non-labeled products. And that’s a fair point. But that also means that industry has an incentive to more proactively educate consumers about the science behind GM-foods, so they won’t be fooled into paying more for something that may not provide the benefits they think.
Cass Sunstein, a Harvard law professor, summarizes the whole point fairly well in the abstract of a recent paper:
Many people favor labeling GM food on the ground that it poses serious risks to human health and the environment, but with certain qualifications, the prevailing scientific judgment is that it does no such thing. In the face of that judgment, some people respond that even in the absence of evidence of harm, people have “a right to know” about the contents of what they are eating. But there is a serious problem with this response: there is a good argument that the benefits of such labels would be lower than the costs.
Consumers would obtain no health benefits from which labels. To the extent that they would be willing to pay for them, the reason (for many though not all) is likely to be erroneous beliefs, which are not a sufficient justification for mandatory labels. Moreover, GMO labels might well lead people to think that the relevant foods are harmful and thus affirmatively mislead them.