Mandatory vs. Voluntary Approaches to Food Safety
(2) Bv-Cv-qL ≥ Bo-pL,
or, equivalently,
(2') (Bv-Bo) + (p-q)L ≥ Cv.
This condition implies that the firm will undertake protective measures
voluntarily (without any government inducement) if and only if the market
benefits of doing so plus the reduction in expected damages the firm will
have to pay exceeds the cost of the voluntary measures.
Suppose instead that a mandatory standard is inevitable if protective
measures are not adopted voluntarily, i.e., r=1. In this case, the firm will
adopt the measures voluntarily if and only if
(3) Bv+S-Cv ≥ Bm - Cm.
Note that this condition is independent of L, since the firm's expected loss
is the same regardless of whether the protection is undertaken voluntarily
or imposed by the government. In addition, given Bv≥Bm and Cv≤Cιn,
condition (3) always holds, even without any subsidies, i.e., even with S=0.
Thus, the firm will always undertake the measures voluntarily if
mandatory controls are certain, since it can reap a potential public relations
benefit and possibly incur lower costs by doing so.
The framework presented here suggests that the decision about whether
to adopt voluntary measures depends on the interaction between a number
of factors, including (I) the expected change in net revenues (through shifts
in demand), (ii) the likelihood that mandatory controls will be imposed if a
voluntary approach is not successful, (iii) the cost differential between
meeting the standard voluntarily and being forced to meet it (perhaps in a
more costly way), (iv) the legal rules regarding the payment of damages for
injuries from contamination, and (v) the availability of any direct financial
inducements from the government. For example, as expected, voluntary
adoption is more likely in markets where consumer demand for the product
is sensitive to product safety. Likewise, the mere threat of possibly less
flexible and hence more costly mandatory standards can induce voluntary
adoption. The greater the threat is, the more likely is voluntary adoption.
However, this incentive requires that there be some potential gain from
voluntary adoption, in the form of either reduced compliance or transaction
costs or increased public "good will" from voluntary adoption. If there is
no threat of regulation and demand is unresponsive to product safety, then
the firm will undertake voluntary measures only if the expected reduction
in damage payments exceeds the expected costs. Of course, if firms are not