# Presentation: 070486

## Pathogen Reduction DialoguePanel 4May 7, 2002The Costs and Benefits of AdoptingFood Safety Interventions.Michael Ollinger

## Market versus Government Allocation of Product Quality

- Firms will invest in food safety quality only if it is profitable to do so.  This requires a clear signal to buyers linking the firm to product quality.
- If  firms are not able to clearly signal their own quality, then government intervention is warranted.

## The Decision-Making Criteria for Food Safety Interventions

**Toolkit**
- Firms Use Net Present Value Calculations
- Government Uses Cost  Benefit Analysis gatekeeper
**Purpose**
- gatekeeper function (Antle, 1995)
- choose among proposals (MacDonald, 1996)

## Net Present Values Calculations of Firms  versus Government Cost Benefit Analyses

**Net Present Value:**
- I < non-food safety profit +market value of food safety
**Cost Benefit Analysis:**
- I+G< non-food safety profit +market value of food safety
- 	 +value of public health benefits

## Market Mechanisms Accruing Health Benefits

**Private Investment with Health Benefits as Unintended Consequence (Profit>0)**
**Example:** investments in automated handling systems.

## Market Mechanisms Accruing Health Benefits

**Private Investment Yields an Obvious Change in Food Safety Quality (Profits>0)**
**Example:  **irradiation.

## Market Mechanisms Accruing Health Benefits

**Contractual Arrangements Yielding  Health Benefits (Profit>0)**
- • Single source suppliers of raw or nonbranded products
- • Branded Products
- • Buyer Contracts Explicitly Requiring Additional Quality Control

## Example of Food Safety Quality Contract

**No Contract:**
- Profits=($1.00-$0.80)/pound*10 million pounds
- 	=$2.00 million
**Contract with $0.03 per pound in quality costs:**
- Profits= ($1.00-$0.80-$0.03)/pound *12 million pounds 	=$2.16 million

## Instances When Private Markets Fail

- •More than one supplier of generic meat products
- •Source of foodborne illness not identified
- •Consumer illness not recognized as foodborne illness

## FSIS Incentives Driving Private Investments That Yield Health Benefits

**A. Shift Responsibility for Quality to Industry**
**1. Increase Industry Food Safety Investment,**
- Voluntary Total Quality Control Programs, 5% adoption;
- Mandatory HACCP, 100% adoption.
**2.  Reduce FSIS non-health related responsibilities**
- New Linespeed  Inspection System, 33% adoption

## FSIS Incentives Driving Private Investments That Yield Health Benefits

**Example:Not all plants use New Linespeed Inspection System**
**Initial Conditions**: FSIS limits linespeed to 70 bird/minute, but 10 workers at plants A and B can produce 120 and 70 birds/minute
**Change:** linespeed of 90 birds/minute allowed with 2 new workers
**Result: **Only plant A benefits so only it changes.
**Conclusion:** plant technology determines adoption.

## FSIS Incentives Driving Private Investments That Yield Health Benefits

**B.  Greater Regulatory Stringency to raise the cost of weak food safety quality control**
**Examples:  Larger sample sizes used for zero tolerance organisms:**
- 1. *E coli* 0157:H7: favors poultry/pork over beef slaughter
- 2.Listeria monocytogenes: favors slaughter over processors

## FSIS Incentives Driving Private Investments That Yield Health Benefits

**C.  New Regulations Raise Food Safety Costs.**
**1 Performance standard: tolerance for target organism**
**Example:** four plants affected by regulation.
- Two meet the standard; do nothing.  Plants A and B must change.
- Plants A and B slaughter 500,000 and 5,000 head per year

## FSIS Incentives Driving Private Investments That Yield Health Benefits

**Performance Standard Example (continued)**
**Option 1:** steam pasteurization ($1 million with 5 year life)
**Cost of pasteurizer**: $0.40 per head at “A”; $4.00 per head at “B”
**Option 2:** better dehiding training ($10,000 per 5,000 animals); worker turnover of once a year at “A”; once every 5 years  at “B.”
**Cost of dehiding**: $2.00 per head at “A”; $0.40 per head at “B”.
**Result**: “A” pasteurizes and “B” changes dehiding operations.
**Conclusion:** plants choose least cost method; least distortion.

## FSIS Incentives Driving Private Investments That Yield Health Benefits 

**C.  New Regulations Raise Food Safety Costs.**
**Process standard: mandated practices or technology.**
**Example 1:** **Per Unit of Time Process Standard.**
**Requirement:** Plants expected to clean hand tools once per hour.
**Plant Size:** Plants A and B process 100 and 5 animals per hour.
**Productivities at plants A and B:** 100 and 5 animals/cleaning.

## FSIS Incentives Driving Private Investments That Yield Health Benefits

**Example 2: Per Unit Volume Process Standard**
**Requirement:** Plants must clean hand tools once every 5 animals
**Productivity:** 5 animals per cleaning for plants A and B
**Conclusion:**
- Volume standards have less distortion than time standards.
- Selected process may not be effective against target organisms.
- Process standards less efficient than performance standard.

## Summary: Markets fail because food safety quality cannot be easily measured

**Some Market Mechanisms to Overcome Lack of Information **
- 1.  Irradiation
- 2.  Contracting directly for improved food safety quality.
- 3.  Creating brand name products.
- 4.  Inadvertent contracts leading to food safety.

## Summary: Incentives Offered by FSIS

- 1. Shift responsibility for quality to industry
- 2. Raise food safety costs by increasing regulatory stringency.
- 3. Increase food safety investment with new regulations.
-  -performance standards less costly relative to process ones.
- -process standards on a per unit basis are least distorting.

## Summary: Assessment

- •Markets need information to function properly
- •FSIS has mainly raised regulatory costs but has provided little information to buyers.
- •FSIS has information on HACCP performance, *Salmonella *standards, and generic *E coli* requirements.
- •Option 1: permit labels stating performance of quality control.
- •Option 2: publish performance rating directly or use a proxy