14
Mandatory vs. Voluntary Approaches to Food Safety
does not bear the full damages from contamination, i,e., whenever s<l.
The magnitude of s will be determined by two factors: (i) the liability rule
in place, and (ii) the Iikehhood that the firm will actually be held liable for
damages, given that liability rule. Even under a rule of strict liability,
where the firm would be legally responsible for all damages, it may not
actually pay those damages. Whether it would actually pay for damages
fully will depend on the incentives that the consumer has to sue for
damages,39 the probability of a successful suit given the contamination,40
and the availabihty of firm assets to pay damage awards.41 Thus, even
with a rule of strict Iiabihty, we would expect s<l. Certainly, a negligence
rule would imply s<l (for non-negligent firms) as well.
Finally, it should be clear that if the producer is also unaware of the
potential hazard, i.e., if B=O as well, then the firm will overproduce the
good.42
Consider next the decision regarding investment in food safety
measures. Condition (8) implies that
(14)
P'(q) = -(l-s) D ≤ O.
In other words, the responsiveness of demand to changes in q depends on
both s and . If the consumer does not perceive the product to have any
food safety concerns ( =0), or s/he knows that any damages from
consumption of contaminated foods will be fully compensated by the
producer (s=l), then the demand curve will not shift in response to changes
in product safety (P'(q)=O). However, any positive perception of
uncompensated damages will cause the demand curve to shift down.
Substituting (f4) into (if) gives the following condition for the choice of
q, given y :
or equivalently,
(15)
(l-s) Dy-C4- sBDy = 0,
39 The incentives of a plaintiff to sue depend upon the expected award and the
litigation costs that s/he would incur. With high litigation costs, even if the
aggregate damage for all individuals is high, a victim may choose not to sue if that
individual's damages are relatively low.
40 In some cases, it may be difficult to prove causation and hence legal Hability.
This is likely to be the case, for example, when damages result from long term
exposure to toxic substances such as pesticide residues on food.
41 Firms with limited assets may not have the resources to pay damages for
which they have been held legally Hable. See Shavell (1986).
42 Antle (1998) characterizes this as "symmetric imperfect information" since
neither producers nor consumers are aware of the potential damages from
consumption of the product.