Stuart Smyth, Peter W.B. Phillips, University of Saskatchewan, Canada

The food sector has been extensively governed by standards and regulations but the rules for biotechnology-based products are still evolving. The incomplete institutional structure for managing risks of new products has been unable to effectively handle new, often incomplete scientific information. In response, the regulatory system has introduced expensive and often sub-optimal rules and procedures. This paper will examine the costs and other impacts of incomplete institutions and information information in the biotechnology based agri-food sectors.

Food safety systems must be able to handle multiple risks and uncertainties that occur at multiple stages in the food system. Three basic types of risk exist: probabilistic risks of health and safety concerns, where there is both theory and empirical evidence; hypothetical risks where there is theory but a lack of experience; and speculative risks where there are uncertainties but no compelling theory or evidence. The food safety system must handle those risks through risk assessment, risk management and risk communications. The national and international regulatory systems for biotechnologically-based agri-food products is incomplete (esp. the risk management and communications elements) and therefore is unable to handle hypothetical and speculative risks.

Given the novelty and heightened awareness of biotechnology in the food system in many developed countries, every new bit of scientific evidence has the potential to influence public opinion about the safety of the products. Recently the biotechnology community had its foundation shaken by the release of scientific data claiming that biotechnology may be producing products that are not as safe as the biotech industry was claiming. The focus of this paper will be to examine the economic impacts that have resulted from Dr. Pusztai’s rat/GM potato research and Dr. Losey’s Monarch butterfly larvae/Bt corn pollen research. Neither of these scientific research papers was peer reviewed prior to being publicly released and both created media sensations. This carried over to consumer concerns, which resulted in governments implementing legislation and standards that were designed to show consumers that domestic governments were doing something to address the problems being caused by biotechnology. This paper will examine the process used to create these standards and the economic impacts they are responsible for.

The paper will examine the economic impacts of government responses to the two studies:

• In Europe, but mainly Britain, Pusztai’s research resulted in governments enacting GMO labeling legislation. This has added costs to producers, processors, retailers and consumers. An estimate will be made to determine what the cost has been to British consumers, both in-terms of increased cost and reduced product availability.

• Losey’s research resulted in the EPA restricting the planting of Bt corn. Bt corn growers will be: required to plant a minimum structured refuge of at least 20% non-Bt corn; required in areas where Bt corn and cotton are grown to ensure that a structured refuge of 50% non-Bt corn; expected to closely monitor fields to detect any potential resistance; required to communicate voluntary measures that will protect non-target insects, particularly the Monarch butterfly; and outright restricted in planting Bt corn in some geographic locations. This has already been viewed as burdensome and may lead some corn producers to reduce their acreage of Bt corn. Some early estimates of the potential size of this loss will be derived using spring 2000 Bt corn seeding versus earlier estimates.

This paper will examine how the new rules affect social welfare in the two key markets and more generally discuss some of the economic impacts of incomplete institutions in markets with rapid technological change.