| In free market economies, governments intervene most frequently when they deem they can improve market efficiency, i.e. when markets "fail." Some studies have shown, however, that regulatory costs can often be substantial and can overwhelm the benefits of regulation. Balancing social costs and benefits is key to regulatory optimality. However, such balancing act is often difficult when decisions about regulatory standards are made as there is a significant knowledge gap on the relationship between regulatory standards and social costs and benefits. As the recent commercialization of genetically modified foods (GMFs) has resulted in intense regulatory activity around the world calling for the specification of various regulatory standards, this lack of knowledge is problematic. Most recently, regulators in the European Union have imposed specific purity standards within the context of mandatory labeling regulation for various foods, food ingredients, and feeds. Additional purity standards for planting seeds are currently under consideration. Yet little is known about the social optimality of the GMF standards implemented or under consideration. This study examines the relationship between alternative purity standards in seed production and associated compliance costs. As the regulation has not yet been implemented, no actual compliance costs exist to assist with the analysis. For this reason, a process simulation model has been developed to replicate the operations of corn seed firms and generate compliance costs for a set of policy-relevant purity thresholds. Results suggest the compliance costs would be positive and significant and that they would increase non-linearly when purity standard becomes increasingly stringent. Regression analysis on expected compliance costs derived from an industry survey confirmed and strengthened the simulation results. |
