Monday, 20 October 2014

What's wrong with caveat emptor?

This was the kind of thing I was worried about when the new food safety bill came in:
Tourists flock to her [Biddie Fraser-Davies] 4.4-hectare farm 20 minutes north of Masterton to enjoy a unique, gate-to-plate culinary and farming experience. Each of her cheeses bears the name of the jersey cow whose milk was used to make it.
But earlier this month a letter from a ministry food safety official told her she had until November 1 to get a $3680 risk management audit, or be forced to close.
That sum amounts to about a ninth of her annual turnover from a business that produces less than a tonne of cheese a year and earns her about $33,000.
Her problems began with an appearance on TV's Country Calendar in 2009, after which government food safety inspectors visited. She said they found her hygiene and equipment were faultless, but still told her she would be closed down unless she developed an approved risk management plan and swallowed a big rise in her compliance costs.
The regime, as I understand it, scales rigour to risk so that lower risk products have fairly small compliance costs. But high fixed costs on things like cheese risks killing off small producers.

Recall that, in 2012, then-Minister Kate Wilkinson said:
The cheese that's produced from three cows or three thousand cows is still expected to be safe. ... We want the Biddies [cheese-maker Biddy Fraser-Davies] of this world to keep producing fantastic cheeses, but we also want that cheese to be safe.
Why shouldn't Biddie Fraser-Davies be able to put a big sign up outside her shop saying that her cheese is produced without an approved risk management plan and that caveat emptor applies? Who's the we in Wilkinson's statement? If it's the people buying the cheese, they should be able to judge for themselves. If it's people who don't buy the cheese, why do they get a say?

I can understand worries about industry-reputation effects if there's botulism or something in one small producer's batch. But are those effects likely to be substantial where things are sold with an explicit caveat emptor sticker?

UPDATE: I had wrongly assumed that Biddie was being chased under the new Food Act. The Food Act, passed in the last Parliament, was meant to stop some of this nonsense for small-scale operators. But Donald, in comments, usefully notes that she's being chased under the old Food Act as the new 2014 Food Act doesn't come into force for some time yet. And so there is no particular inconsistency between the former Minister's having said she wanted Biddie to be able to continue making cheese under the new Act, and that she's currently being chased. It's a bit odd that none of the officials quoted pointed to the forthcoming changes that might ease things up for those in her situation.


  1. yummy cheese too - had it at a restaurant this year :)

  2. But are those effects likely to be substantial where things are sold with an explicit caveat emptor sticker?

    Depends on whether everyone is doing it. If all businesses are slapping a "caveat emptor" sticker on, then effectively it's meaningless and you don't really get a choice between taking the risk and just eating ostensibly greater cheese. It's like trying to get a cell phone here in the US if you object to mandatory arbitration clauses - they all do it, so there's essentially almost no avoiding it unless you just want to not have a cell phone.

  3. There is a difference between a Caveat Emptor sticker outside a small cheese operation and the same outside a supermarket or white goods manufacturer.

    In any competitive endeavour, the use by one participant of a Caveat Emptor sign is gifting money to the others.

  4. What about the flow on costs if her cheese goes really wrong. Do you expect that Biddy will pick up the bill for the people who are hospitalised from food poisoning, or the ACC payouts if they die? Or the welfare payments to the kids they leave behing? Or are you really expecting that she can free-ride on the rest of us?

    Just wondering how far the "caveat emptor" actually goes.

  5. Isn't there a legitimate externality here, where if someone eats at her restaurant and gets sick, the state picks up the healthcare bill?

    I don't know what the magnitude of the risks is - almost certainly far less than $3680 a year in expected healthcare costs. But it might be a reason the state would want to impose accreditation requirements on restaurants.

  6. We are all born ignorant, but one must work hard to remain stupid. See the link below for more info.


  7. You can make your own cheese at home; if you get sick from it, same thing, right? Do we ban home cheese-making?

  8. No, I don't expect that she would pick up those costs. Can you remind me how much an amateur rugby club pays in annual ACC levies relative to the cost of rugby injuries, and who picks up the welfare payments to the orphans of those dying in skiing accidents?

  9. If it's sold on at restaurants, that makes caveat emptor more difficult - you'd then need that labelling to flow on to other distribution sources.

  10. So its a case of "we pay for your health so it belongs to us"?

  11. It's just possible that the Food Act 2014 will reduce her registration and certification costs. The requirement for an RMP comes from other older legislation covering products such as meat, dairy and eggs. Like all older legislation it assumes everyone is Fonterra or Silver Fern Farms.

    The new legislation requires every food operator to have a Food Safety Plan covering their individual operation. In theory it is more sensible in that it is risk-based and customised to each business. For the majority of small operators they will be audited by their local council (same as today). Fingers crossed it will cost a lot less than the commercial auditors who currently carry out audits like the one you mention.

    As a small niche operator Biddie may be able to get her operation audited locally and save a bundle.

  12. The joke of this situation is that Biddie's current problems are all the result of Fonterra's stuff ups (and the resultatn food safety panics) , so in a better world they should be doing the paying. Regards the safety of her cheese, as the story says "they found her hygiene and equipment were faultless" The thing they complained about was her paperwork - she did not have a paper trail showing how the milk had gone from the farm to the cheese maker. But in this case they were they same people, so what was a paper trail meant to do exactly?

  13. The report says "she says they found her...". We don't know what the inspectors really did find. Sometimes, they're officious because they didn't like what they saw, and sometimes they're just officious.

  14. Donald, thanks for that. I'd assumed that, with the Act's having passed in the last Parliament, it was now in force. It looks like it's not yet been implemented, and so you're right. I will update.

  15. Officious is probably an understatement. Biddie lives in Ekatahuna - its a tiny place. She has three cows (she used to have 4). There were something like 14 officials in the town for most of the week.!!

  16. You ask "are those effects likely to be substantial where things are sold with an explicit caveat emptor sticker" - possibly not, if only one or two small producers use this get-out to avoid the costs of complying with food safety regulations, and if the media are careful to report the difference.
    But if everybody went down the "caveat emptor" option - and why wouldn't they? - then certainly one bad batch could do great damage to the entire industry, including exporters.

  17. PS: Why would this lady think it in her interest to actively seek widespread media coverage of the fact that she is producing food under conditions that haven't been officially confirmed as being up to standard?

  18. Well I got told the name if the cow, so assumed it was small. And I'm quite happy to accept the judgment of an expensive restaurant.

  19. Small operators like me were regulated under regulations made in 1974 under the Health Act 1956. The Food Act 1981 gave us the chance to opt out of council registration and into the national risk management regime. Almost nobody did because it cost too much.

    The Food Act 2014 supersedes all that old legislation and makes the risk-management regime mandatory for all food operators.

    However, all processors of primary animal products (meat, dairy and eggs) are regulated by MPI under the Animal Products Act 1999. This would include Biddie of course.

    The other thing is the story may not be differentiating between the cost of having an RMP accepted and the cost of an annual audit. $3680 sounds more like the one-off acceptance fee. Having said that she still wouldn't get much change out of $1500-$2000 on an annual basis.

  20. Doesn't that just increase the return to being certified?

  21. No of course not, that would be stupid. I do agree that this is a case where licensing is absurd. But we do regulate or charge for risks that are sufficiently large to merit the transaction costs of doing so. Eg. minimum safety requirements for workplaces, higher ACC levies for certain jobs. It's part of the 'deal' of being covered by ACC: you generally can't sue for accidents but get full cover through state care (thereby eliminating lots of transaction costs and lawyers fees that would exist in a free market situation - not to mention inequities). The cost of an accident is transferred from the restaurant to the state - so yes it is an externality unless your customers somehow legally opt out of ACC. It's an empirical question as to whether the risk is big enough for it to be worth charging for. I'm certain it wouldn't be, but the theoretical possibility exists. Anyway, a true caveat emptor would include an opt out of ACC.

  22. What we call food safety regulation is an omnibus of four different strands:
    - preventing food-borne illness (norovirus, botulism etc)
    - food integrity and standards (and a touch of mass medication)
    - food labelling ('Warning these peanuts may contain peanuts')
    - aesthetics (won't hurt you but it's a bit yucky)

    While there is no question that we have well and truly hit diminishing returns territory in all this regulation we are more or less stuck with it because consumers have come to rely on it.

    Where consumers are happy to bypass the regulations is when they an establish a relationship of trust directly with the operator. Like the unlicensed dining clubs of Manhattan it is feasible to run a 'dark' operation where the customers vouch for the quality of the producer. This process tends to appeal to the highly motivated and sophisticated consumer who are pretty much the people you would want to put a 'caveat emptor' option to.

    I would be comfortable with a general exemption to food licensing where the operator does not advertise, does not retail through third parties and there is some kind of consumer rating system in place (Tripadvisor).

  23. Two responses.

    First, on a broader level, the whole deal is kinda stinky. "Because you are compulsorially enrolled in an insurance scheme that you might not even want to be a part of, you are consequently forbidden from doing things that might increase costs to the insurance scheme." The action you undertake might impose an external cost, but it is not a policy-relevant externality. Buchanan and Stubblebine are pretty clear here on the delineation. Unless the risk cost externalisation is having real effects on risk-taking, there is no externality. And if it is having a real effect, it's only the cost associated with the change in consumption that gets to count as an externality, not the total amount of cost.

    Second, the risk from amateur rugby is almost certainly larger than risk from eating small-batch small-market cheese, or at least in terms of cost to the ACC/health system. We don't require amateur rugby players, or those clubs, to pay any premium for that service. And we'd ban people from choosing to eat opt-out cheese?