On the Economics of Food Quality Standards and Integration in the European Community

Part of the process of completion of the European Community's (EC's) internal market relates to the harmonization of EC food safety and health standards. In order to understand the economic implications of this process for the EC food industry, this paper addresses three interrelated issues. First, if competitive markets do not generate the necessary standard-assuring mechanisms, the nature of such a market failure needs to be understood. By setting out a simple model of contractual enforcement, it is possible to show that asymmetric information on quality components is sufficient for the quality-enforcement mechanism not to work in the case of food quality and safety. Second, if standards have to be set by public institutions, the nature of harmonization at the EC level can be examined. Specifically, it is important to assess the economic implications of the concept of "mutual recognition" in the setting of EC food standards. It is possible that this will lead to minimum standards in the Community which has certain welfare implications for consumers and producers. Alternatively, under certain assumptions, removing internal barriers to trade may drive down the price of food quality and may even result in the exit of low quality goods. The process of harmonization may also provide differing opportunities for rent-seeking by both consumers and food producers, therefore, it is useful to consider the likely impact of such behavior on both internal food prices and external trade.