Making a Regulatory Choice: Tools and Policies

The approach interfering the least with the individuals’ freewill and personal utility maximisation is that of an information campaign. As long as we assume the consumer will make rational decisions and have full information in the market, an information campaign might be a very valuable tool (Beverland, 2014). The aim is to inform the consumer about all the positives and negatives of the good they consume – in this case, about the adverse health, environmental and social effects that meat consumption poses.

However, some difficulties with this approach have been identified in the past.

Firstly, a lack of knowledge exists amongst consumers when it comes to nutrition. This is amplified by an overflow of news and flawed research concerning food benefits and deficits, circulating on the web and social media (Kutasi & Perger, 2015; Hill, 2020).

Due to imperfect information, even if consumers were indeed to behave entirely rational, their decision making would be flawed and misinformed. While information campaigns aim to combat this, it would take significant investment, and because of the general noise existing on online platforms regarding this topic, its success would likely be minimal.

Furthermore, the meat industry might also create counter campaigns that devalue or reduce the impact of anti-meat information campaigns. The EU alone has spent more than €60 million over the past three years promoting meats in our diets (Boffey, 2020).

Also, meat producers themselves might use marketing tools to promote benefits of meat consumption, both emotional and rational, to consumers. This communication noise might prevent individuals from receiving any of the right information, leading to a lack of effectiveness of the campaigns.

Secondly, as stated in Chapter 2.3.1., eating provides deeply personal value and is highly connected to culture and social institutions. The emotional connection prevents consumers from acting in a manner that would be seen as fully rational from the outsider's point of view. Therefore, information campaigns have failed to create real shifts in the past, and this is likely to remain the same in the future (Beverland, 2014;

Edjabou & Smed, 2013).

While an information campaign should not be ruled out as a complementary approach and can potentially help consumers and producers to understand and appreciate the impending policy better, it seems unfeasible as the only method when trying to create change, especially at a quick pace.

3.1.2. The Coase Theorem

Another approach, which is free of governmental interference, is the Coase theorem.

This theory states that the market can regain efficiency on its own because the damaged and damaging party both see value in cooperating. Those that create the externality cost will either pay the affected party some compensation, or the affected one will pay so that the other will cease the harmful action. This depends on whichever has been estimated to be more valuable. However, the Coase theorem faces two requirements to work: first, it needs to be clear who has the legal property rights; second, there should be little to no transaction cost (Nicholson & Snyder, 2010, p. 573-575; Lambert, 2017).

However, in the case of meat consumption, neither requirement is given. Firstly, in terms of the adverse effects in health and the environment, it is not clear who has the legal responsibility for it: the producer or consumer. Even more importantly, the Coase theorem requires no transaction cost. Therefore, due to the aforementioned asymmetry of information, and the need for individuals to bargain with more prominent players, one can safely assume this not to be the case (Nicholson & Snyder, 2010, p. 575).

Therefore, while an approach where the market would manage to regulate itself would be preferable, these particular externalities will more likely require governmental interference.

3.1.3. Command and Control Policies

To control unwanted side effects of specific goods consumption or production, governments can impose regulatory measures. The critical aspect of command and control policies is that they are more static and restrictive. Those policies come in different forms such as standards, bans, permits and caps.

Bans and other similar limitations forbid certain levels of externalities to be exceeded.

For instance, one could impose a maximum level of emission per company or forbid certain pesticides to be used (Nicholson & Snyder, 2010, p. 579; Open Textbook Library, 2018, pp. 677-681). In terms of meat consumption, this would mean regulating the individual's consumption pattern and reducing most consumers' surplus.

Consumer surplus is a measure of the added value each consumer receives when consuming a good. It is measured as the difference between the price they are willing to pay and the actual price of the good. Consumer surplus is tightly linked to utility, as can be seen in Figure 5. In an unregulated environment, an individual consumer faces its utility curve and budget constraint (U1 and I in the graph) and chooses to consume the quantities of the represented goods at the tangency of those two lines. If a ban or limit of one good were to be introduced, the consumer would fall to a lower utility curve (U0).

If one wants to prevent this reduction in utility or surplus, individuals have to be compensated by the amount that would propel them back onto the original utility curve.

In this case, if there was an absolute ban, where the consumer would have to spend all their goods on “other goods”, the so-called compensating income variation would be the distance between A to B. This equals the loss in consumer welfare that individuals face (Nicholson & Snyder, 2010, p. 103-106).

Figure 5: The impact of bans on consumer surplus and Individual’s utility (Nicholson & Snyder, 2010, p. 103).

In terms of meat production, a ban or cap could be implemented on production, for instance, limiting the number of cattle a farmer may slaughter per year. What would such a policy, however, mean for welfare and consumption? It would create a significant deadweight loss, and prices would likely be higher. This leads to a decrease in consumer surplus, and whilst there is an increase in the producer surplus, there will also be an increase in deadweight loss. The deadweight loss will also represent the loss of some suppliers that are forced from the market, simply for lack of production capacity.

Figure 6: Imposing a ban would reduce the output levels and create a deadweight loss (FEG) and with no price control shift some of the consumer surplus to the producer as well (Nicholson & Snyder, 2010, p. 324).

The most common regulatory approach is permits. The government decides upon a maximum acceptable level of the externality, that may be imposed on society. For this quantity, the production and consumption are believed to provide higher value than the externality it generates. Sometimes, it may even not generate any externality, until a certain quantity of production is exceeded. (Nicholson & Snyder, 2010, p. 579). The individual producers are then permitted to produce a certain amount of this externality via issued permits. These permits are usually tradeable. This allows a more efficient firm, for instance, to sell their excess to other companies that may require higher amounts (Shepard, 2014). This seems to be a common approach in terms of emission regulation, to the point that there are markets such as the European Union Emission Trading System set up for this purpose alone (Open Textbook Library, 2018, p. 686-691). One benefit is that the government is in control of the total amount of emission. It can higher or lower it centrally, depending on what they deem suitable. (Shepard, 2014) However, this benefit of governmental control might also be its most significant deficit.

One concern is that governments and their agencies might not be acting in the publics

best interest, having been (legally or illegally) manipulated by some. Even when they do have the population’s best interest in mind, it might be challenging to make a fully informed and efficient choice. As presented in Chapter 2, the externality cost of meat consumption, for instance, depends on a multitude of factors, some which are hard to account for. This lack of knowledge poses a threat to those regulatory policies.

(Lambert, 2017).

Furthermore, Zywicki (1999) argued that command and control policies might lead to a lack of competition and entrepreneurship. This is further amplified by the fact that implementing some of these policies could be proportionally more costly to smaller companies, thus eliminating them from the competition. This fact is also visible in the deadweight loss, visualising a reduction in supply. Bigger companies will then be able to benefit from such policies, and imperfect competition may be created (Zywicki, 1999). Lambert (2017) therefore reasons that using a tax instead may encourage companies to create further efficiencies and reduce their output potentially even below the limit set by the cap. In any case, a tax is a way to internalise the externality cost of a good’s consumption and/or production. A correctly priced good in turn can lead to the elimination of market inefficiencies (Lambert, 2017).

3.1.4. Market-based Policies

While there is an ongoing debate on whether governments should intervene at all, economists have been suggesting using market-based policies, such as taxation and subsidies instead of command and control ones (Cremer et al., 1998). In particular, the Pigouvian tax aims to tax either production or consumption based on the amount of externality cost they produce, to value the good at its full social cost. This is believed to be a more dynamic system as it restores the efficient market equilibrium and allows the market to flexibly react to those incentives rather than being fully regulated (Open Textbook Library, 2018, pp. 681-686; Frank, 2008). Furthermore, taxes have proven to be a less costly system, often even generating revenue to the imposing agency (Frank, 2008).

Ultimately, taxes increase the market cost of a good. The Pigouvian tax aims to internalise externality cost into the good’s final price and have those creating the damage pay the price for it in turn (Kutasi & Perger, 2015; Cremer et al., 1998). As a heightened price disincentives negative externality, a tax is assumed to recreate market efficiency

can see the original marginal cost curve (MC) before internalising the externality cost and then the marginal social cost curve (MCS) which is composed of the private cost plus the externality cost combined. As the initial market outcome produces a too high quantity at a too low price, one may be including the externality cost in the price by imposing a tax (t). It is important to note that this tax is to be set at the efficient market optimum Q‘ instead of the externality-ignoring equilibrium, as seen at Q. (Nicholson &

Snyder, 2010, p. 578; Snyder et al., 2015, p. 510).

Figure 7: The effect of imposing a Pigouvian Tax to combat externality inefficiencies. (Adapted from Nicholson &

Snyder (2010, p. 578)).

In the case of meat consumption, such a tax would mean an increase in price for meat products. This, in turn, will reduce its quantity demanded. If we assume that each additional unit of meat poses the same externality cost, then a reduction of consumption would mean a reduction in the overall externality cost imposed on society. However, the extent of the consumption reduction is also dependent on consumers price elasticity (Kutasi & Perger, 2015). However, estimating the concrete value of such a tax is as tricky as with estimating the size of other policies. The final imposed tax in practise may therefore not be a real Pigouvian tax, but instead it is based on the concept of using taxation to combat externalities. This in turn means that such tax could cause effects such as a deadweight loss (Choi & Johnson, 1992). Still, it is a more flexible tool than regulative counterparts. If the externality cost outweighs the value of production or

tax

good. Similarly, if the good is of higher value to them than the tax they have to pay, they may decide to keep consuming or producing. It leaves the market players a choice (Frank, 2008).

Lastly, taxes may also serve as an incentive for market players to innovate. As every unit of negative externality reduced will result in a real saving of money, firms and even individuals may start finding more efficient ways to produce and consume goods. This may not be the case with an absolute cap or ban, where after reaching the legally obliged point, there is no further incentive to reduce the externality cost. Therefore, taxes serve as a better motivator (Zywicki, 1999).

In summary, one can say that taxation has many benefits over the other tools as:

A. Governments can use the revenue it generates to fund transaction costs and counter the externality costs.

B. Specifically, Pigouvian taxes, instead of prohibiting consumption, prices goods at their full value (social cost). If the good at the new price provides enough utility to the individual, they will still purchase it. Otherwise, they may choose to substitute. In either case, the market will operate more efficiently, and the players will still make their own decisions.

C. It is more equitable across larger and smaller companies than equivalent regulations that may cost the same in absolute, but not relative terms.

3.1.5. Consumption versus Production Taxes

When imposing a tax, the government needs to decide who is taxed and what the tax is being based on. In terms of meat production and consumption, one could either tax the production (such as the emission levels it generates) or the consumption of meat.

Generally speaking, a tax on production would lead to a more efficient outcome for the market by having the potential to fully bridge the gap of private and social cost (Wirsenius, Hedenus, & Mohlin, 2011). However, previous research has made several arguments favouring a consumption tax.

Firstly, if one were to tax the production side, it would be difficult and therefore costly to control how much emission or externalities the different producers generate. This would result in the need for agencies to monitor producers, which would likely lead to high additional cost that would not occur if consumption were to be taxed instead (Edjabou & Smed, 2013; Wirsenius, Hedenus, & Mohlin, 2011).

Secondly, it also helps to avoid putting domestic producers in a disadvantageous position, as taxing production would have two effects. Firstly, meat production would become relatively costly for the local farmers compared to their international competitors. This could also result in some of them deciding to exit the market. Second, it would increase imports of the now cheaper meat products, which would then result in increased emissions in the countries of meat production origin and in terms of transportation (Abadie, Galarraga, Milford, & Gustavsen, 2015; Caro, Frederiksen, Thomsen, & Pedersen, 2017; Wirsenius, Hedenus, & Mohlin, 2011).

Thirdly, Säll and Gren (2015) also argue that due to meat consumption having a variety of externality effects, taxing consumption would be more advantageous, as it tackles a broader range of targets. Concretely, they state that one can create a consumption tax that incorporates the externality cost of a multitude of pollutants at once.

While from a policy point of view, there needs to be a clear-cut decision on whom the tax is imposed on, the tax burden will likely be shared between both parties: consumers and producers. However, the weight which befalls each depends on their elasticities.

The market player that can more easily respond to the change in price (and hence is more elastic) will have to carry less of the cost (Nicholson et al., 2008, pp. 330-331;

Mankiw, 2016, pp. 124-127).

Figure 8: Elasticity of supply and demand determine how the tax burden is shared. If supply is more elastic, consumers pay more of the tax (A) and producers less (B) (scenario in the graph) and vice versa (adapted from Mankiw, 2016, p. 126)

In conclusion, these arguments point towards a policy approach of taxing meat consumption, as opposed to production or other approaches. It also facilitates the comparison between the consumer’s utility and the generated externality cost. However, a consumption tax must be carefully crafted and reviewed to provide its full, positive effects.