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  • Dinopoulos, Elias
  • Livanis, Grigorios T.
  • West, Carol Taylor
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    Abstract

    This paper develops a partial equilibrium model of a small open-economy producing and trading an unsafe product that is supplied by perfectly competitive producers. The presence of product safety considerations, in this case risks to health, introduces a wedge between the market prices producers receive and the higher risk-adjusted prices consumers respond to. The size of the wedge depends positively on the per-unit cost of illness and the proportion of unsafe units embodied in the parent risky product. The model is used to analyze the welfare effects of trade with and without a country-of-origin labeling (COOL) program. Assuming imports are less safe than domestic production, the welfare gains from trade in the absence of COOL are ambiguous and may justify the imposition of a trade ban. Even if a full ban does not improve welfare, some restriction of trade is always welfare-enhancing. These outcomes derive from an informational distortion that prevents consumers from distinguishing the different country-specific risks embodied in the foreign and domestic products resulting in a pooling equilibrium. The presence of a COOL program removes the informational distortion and generates a welfare maximizing separating equilibrium in which the safer (domestic) product commands a higher market price. In the presence of a COOL program, more trade – caused by a reduction in protection – is better than less trade.

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    File URL: http://purl.umn.edu/15658
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    Bibliographic Info

    Paper provided by University of Florida, International Agricultural Trade and Policy Center in its series Working Papers with number 15658.

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    Date of creation: 2005
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    Handle: RePEc:ags:uflowp:15658

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    Web page: http://www.iatpc.ifas.ufl.edu/
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    Related research

    Keywords: country-of-origin labeling; protection; product safety; welfare; Food Consumption/Nutrition/Food Safety; International Relations/Trade; F10; F13; L15;

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    References

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    18. Falvey, Rodney E, 1989. "Trade, Quality Reputations and Commercial Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(3), pages 607-22, August.
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