By Eric Crampton 24/04/2017

Twitter suggests there’s a pretty common fallacy out there that needs a bit more thorough treatment. Here’s how it looks:

  1. Free markets require informed choices
  2. Therefore the government should compel companies to label their products about things that I happen to care about. Otherwise how can people make informed choices?

Why is this an error? There’s an infinite array of things that could show up in (2) as basis for labelling because different people care about different aspects of products.

In the absence of mandatory labelling, consumer demand combined with labelling costs ultimately drive what gets put on a label. Consider country of origin labelling. Some suppliers specialise in a pure NZ product – and proudly say so on the label. Others will shift supply depending on what’s going on in different markets: some disease outbreak might hit pork from Thailand but not from the Philippines and so processors will shift from one place to another if their customers don’t care so much about the product’s country of origin. And others will proudly label their product as Danish butter or Swiss chocolate.

In that set-up, companies will provide information about whatever they think will help them make sales. Some will make a big point about their country of origin, targeting customers who care about that. Others will make a big point about animal welfare. Others will highlight that the product doesn’t have gluten. And, importantly, customers aren’t idiots. If one package of bacon has a pile of credible labelling about that the bacon was grown cage-free in New Zealand and processed here, another says it’s cage-free and from Denmark, and the other one says nothing about either cage status or about country of origin, then it’s pretty likely that the last one comes from caged pigs in places that are either too complicated to tell you about (constantly shifting supply chain), or from places that they think you’ll not like it to come from. Equilibrium in those kinds of games is that everyone discloses except for the ones with the least desirable characteristics – but it can also be the case that, for that brand, customers just don’t value the information as much as it would cost to provide it.

What do I mean? It is really easy for casual observers to say “Oh, it wouldn’t cost them much to label products about X.” Take again country of origin labelling. It sounds cheap, right? But what if your supply chain includes suppliers from dozens of countries and you shift among them depending on time of year and local market conditions? You then have two options: more expensive products where the company has to add in a constantly varying label or sticker, or a rather less useful label saying “Our product may contain wheat grown in Canada, the United States, New Zealand, Australia, India, the Ukraine, Pakistan, Egypt, Argentina, Serbia, Morocco, Turkey, France, Germany, Uzbekistan and Kazakhstan, and may contain strawberries sourced from New Zealand, Australia, the United States, (or dozen other countries) depending on the time of year.” And then you have to change the label again if trade embargoes on Russia change.

Like, it’s not technically impossible: HAACP batch labelling would link back to where that batch’s component parts came from, and you could imagine setting up more expensive labelling kit that would generate stickers from the batch label – but it is more expensive, and suppliers could already be doing it if customers valued it. If your basic model of the world is that suppliers are all colluding to keep valuable information from customers, then you should quit your job and start up a company that fills the gap. The profit opportunity must be huge. Be the firm that has the more expensive labels and profits by telling everybody!

Image result for country of labelling nzMeanwhile, a speciality producer whose customers care about New Zealand sourced product can easily self-identify with a big “Made in New Zealand with New Zealand grown ingredients” label to attract those customers that care about it. And people who want that can and do pay extra for it.
Some underappreciated points about markets:

  1. What consumers want drive what firms provide;
  2. What consumers say they want can differ from what they’re willing to pay for;
  3. Companies are best placed to know their own cost structures;
  4. Markets are really pretty good at providing what people are willing to pay for. Entrepreneurs in free markets are constantly looking for opportunities to provide things that people value and that can be supplied profitably.

Some underappreciated points about politics:

  1. Regulators are really good at mandating things that voters say they want but that voters, as consumers, are unwilling to pay for. Whenever they do this, they destroy value;
  2. Mandatory labelling guidelines depend on political demand, not economic demand;
  3. Voters are far more protectionist and anti-foreign when they’re voting than when they’re buying things.

I can see cases for compulsory labelling about allergens. If a small set of consumers would experience huge costs from inadvertently eating peanuts, for example, then the niche of “Guaranteed Peanut Free” products would be pretty small, and the downside costs are very large. Beyond that, though, it’s real hard to see the case for expanding the set of compulsory labels.


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