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

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.

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Paper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 02-wp302.

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Date of creation: May 2002
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Handle: RePEc:ias:cpaper:02-wp302
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  1. Moschini, GianCarlo, 2001. "Biotech-Who Wins? Economic Benefits and Costs of Biotechnology Innovations in Agriculture," Staff General Research Papers 5125, Iowa State University, Department of Economics.
  2. Fischer, Ronald & Serra, Pablo, 2000. "Standards and protection," Journal of International Economics, Elsevier, vol. 52(2), pages 377-400, December.
  3. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  4. Moschini, GianCarlo & Lapan, Harvey E., 1999. "Intellectual Property Rights and the Welfare Effects of Agricultural R&D," Staff General Research Papers 1735, Iowa State University, Department of Economics.
  5. Lapan, Harvey E. & Moschini, GianCarlo, 2000. "Incomplete Adoption of a Superior Innovation," Staff General Research Papers 1738, Iowa State University, Department of Economics.
  6. Lin, William W. & Price, Gregory K. & Allen, Edward W., 2002. "Starlink: Impacts On The U.S. Corn Market And World Trade," 2002 Annual meeting, July 28-31, Long Beach, CA 19715, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  7. Allen, Douglas W & Lueck, Dean, 1998. "The Nature of the Farm," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 343-86, October.
  8. 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.
  9. 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.
  10. Golan, Elise H. & Kuchler, Fred & Mitchell, Lorraine, 2000. "Economics Of Food Labeling," Agricultural Economics Reports 34069, United States Department of Agriculture, Economic Research Service.
  11. Moschini, GianCarlo & Lapan, Harvey E. & Sobolevsky, Andrei, 2000. "Roundup Ready Soybeans and Welfare Effects in the Soybean Complex," Staff General Research Papers 1799, Iowa State University, Department of Economics.
  12. 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.
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