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Innovation and Trade with Endogenous Market Failure: The Case of Genetically Modified Products

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Abstract

We build a partial-equilibrium, two-country model to analyze some implications of the introduction of genetically modified (GM) products. In the model, innovators hold proprietary rights on the new technology, whereas farmers are (competitive) adopters; some consumers deem food produced from GM products to be inferior to traditional food; countries trade both traditional and GM products; countries can adopt regulations (such as mandatory labeling of GM products) that have direct trade implications; and, crucially, the mere introduction of GM crops affects the costs of non-GM food (because it makes it necessary to implement costly identity preservation). The analysis shows that, although agricultural biotechnology innovations have the potential to improve efficiency, some agents (consumers and/or producers that adopt the innovation) can actually be made worse off by the innovation, and indeed it is even possible that the costs induced by the innovation outweigh the efficiency gains. The study also illustrates the potential for protectionist policies that arise in the context of regulating GM products. In particular, mandatory labeling of GM products (as being implemented by the European Union) is unnecessary, inferior to a system of voluntary labeling, and has costly implications from the perspective of an exporting country that adopts GM products. But this costly labeling policy may actually benefit the importing country that implements the labeling requirement.

Suggested Citation

  • Harvey E. Lapan & GianCarlo Moschini, 2002. "Innovation and Trade with Endogenous Market Failure: The Case of Genetically Modified Products," Center for Agricultural and Rural Development (CARD) Publications 02-wp302, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  • Handle: RePEc:ias:cpaper:02-wp302
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    References listed on IDEAS

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    1. Giancarlo Moschini & Harvey Lapan & Andrei Sobolevsky, 2000. "Roundup ready® soybeans and welfare effects in the soybean complex," Agribusiness, John Wiley & Sons, Ltd., vol. 16(1), pages 33-55.
    2. Lapan, Harvey E & Moschini, Giancarlo, 2000. "Incomplete Adoption of a Superior Innovation," Economica, London School of Economics and Political Science, vol. 67(268), pages 525-542, November.
    3. Bullock, D. S. & Desquilbet, M., 2002. "The economics of non-GMO segregation and identity preservation," Food Policy, Elsevier, vol. 27(1), pages 81-99, February.
    4. Allen, Douglas W & Lueck, Dean, 1998. "The Nature of the Farm," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 343-386, October.
    5. Golan, Elise H. & Kuchler, Fred & Mitchell, Lorraine, 2000. "Economics Of Food Labeling," Agricultural Economics Reports 34069, United States Department of Agriculture, Economic Research Service.
    6. Fischer, Ronald & Serra, Pablo, 2000. "Standards and protection," Journal of International Economics, Elsevier, vol. 52(2), pages 377-400, December.
    7. Giancarlo Moschini & Harvey Lapan, 1997. "Intellectual Property Rights and the Welfare Effects of Agricultural R&D," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1229-1242.
    8. William Lin & Gregory K. Price & Edward W. Allen, 2003. "StarLink: Impacts on the U.S. corn market and world trade," Agribusiness, John Wiley & Sons, Ltd., vol. 19(4), pages 473-488.
    9. Moschini, GianCarlo, 2001. "Biotech--Who Wins? Economic Benefits and Costs of Biotechnology Innovations in Agriculture," Estey Centre Journal of International Law and Trade Policy, Estey Centre for Law and Economics in International Trade, vol. 0(Number 1), pages 1-25.
    10. Thirtle, Colin G. & Srinivasan, Chittur S. & Heisey, Paul W., 2001. "Public Sector Plant Breeding In A Privatizing World," Agricultural Information Bulletins 33775, United States Department of Agriculture, Economic Research Service.
    11. Beales, Howard & Craswell, Richard & Salop, Steven C, 1981. "The Efficient Regulation of Consumer Information," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 491-539, December.
    12. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
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