I ran across this post over at RegBlog which notes that the USDA will have to do a cost-benefit analysis of the new mandatory labeling law for GMOs. The post relies heavily on this paper by Cass Sunstein written back in August. Sunstein's article discusses the fact that regulatory agencies typically do a very bad job at quantifying the benefits of mandatory labeling policies (and identifying when or why those benefits only apply to mandatory rather than voluntary labels).
Sunstein argues that, in theory, consumer willingness-to-pay (WTP) is the best way to measure benefits of a labeling policy. I wholeheartedly agree (and have even written papers using WTP to estimate the benefits of GMO labels) but I want to offer a couple important caveats.
The issue in ascertaining the value of a label isn't whether consumers are willing a premium for non-GM over GM food. Rather, as emphasized in this seminal paper by Foster and Just, what is key is whether the added information would have changed what people bought. If you learn a food you're eating contains GMOs (via a mandatory label) but you're still unwilling to pay the premium for the non-GMO, then the the label has produced no measurable economic value. Thus, a difference in WTP for GMO and non-GMO foods is a necessary but not sufficient condition for a labeling policy to have economic value.
The Foster and Just paper outlines the theory behind the value of information. Here's the thought experiment. Imagine you regularly consume X units of a product. Some new information comes along that lowers your value for the product (you find out it isn't as safe, not as high quality, or whatever). Thus, at the same price, you'd now prefer to instead consume only Y units of the product. The value of the information is the amount of money I'd have to give you to keep consuming X (the amount you consumed in ignorance) in spite of the fact you'd now like to consume only Y. Given an estimate of demand (or WTP) before and after information, economists can back out this inferred value of information.
But, here is a really important point: this conception of the value of information only logically applies in the case of so-called "experience" goods - goods for which you know afterward whether it was "high" or "low" quality. Just and Foster's empirical example related to a food safety scare in milk. In their study, people continued to drink milk because they didn't know that it had been tainted. By comparing consumer demand (or consumer WTPs) for milk before and after the contamination was finally disclosed, the authors could estimate a value of the information. In this case, the information had real value because the people would really have short and long term health consequences if they kept consuming X when they would have wanted to consume Y.
It is less clear to me that this same conceptual thinking about the value of information and labels applies to the case of so-called "credence" goods. These are goods for which the consumer never knows the quality even after consumption. Currently marketed GMOs are credence goods from the consumers' perspective. Unless you're told by a credible source, you'll never know whether you ate a GMO or not. So, even if a consumer learned a food was GMO when they thought it was non-GMO, and wanted to consume Y instead of X units, it is unclear to me that the consumer experienced a compensable loss.
Expressing a view with which I'm sympathetic, Sunstein also notes that mandatory labels on GMOs don't make much sense because the scientific consensus is that they don't pose heightened health or environmental risks. Coupling this perspective with the credence-good discussion above reminds me a bit of this philosophical puzzle published by Paul Portney back in 1992 in an article entitled "Trouble in Happyville".
“You have a problem. You are Director of Environmental Protection in Happyville, a community of 1000 adults. The drinking water supply in Happyville is contaminated by a naturally occurring substance that each and every resident believes may be responsible for the above-average cancer rate observed there. So concerned are they that they insist you put in place a very expensive treatment system to remove the contaminant. Moreover, you know for a fact that each and every resident is truly willing to pay $1000 each year for the removal of the contaminant.
The problem is this. You have asked the top ten risk assessors in the world to test the contaminant for carcinogenicity. To a person, these risk assessors - including several who work for the activist group, Campaign Against Environmental Cancer - find that the substance tests negative for carcinogenicity, even at much higher doses than those received by the residents of Happyville. These ten risk assessors tell you that while one could never prove that the substance is harmless, they would each stake their professional reputations on its being so. You have repeatedly and skillfully communicated this to the Happyville citizenry, but because of a deep-seated skepticism of all government officials, they remain completely unconvinced and truly frightened - still willing, that is, to fork over $1000 per person per year for water purification.”
What should the Director do? My gut response to this dilemma is the same as what my Ph.D. adviser Sean Fox wrote in a chapter for a book I edited a few years ago:
“It’s a difficult question of course, and the answer is well beyond both the scope of this chapter and the philosophical training of the author.”