In other words, the company knows more about the car than you do, something economists call asymmetric information. Economist George Akerlof won a Nobel Prize for his work on asymmetric information and how it leads to terrible market outcomes.
Similarly, food has characteristics that can be observed only after purchase. You can pick up an apple and see whether it has any blemishes, but you don’t really know how it will taste, and you cannot know how many calories it has even after consumption. That’s where food labels can help.
Exploiting the knowledge gap
Unfortunately, the problem of asymmetric information can never be eliminated entirely, and consumers may never have as much knowledge as they’d like when making purchases.
Mandated labelling has helped narrow this gap, particularly when the additional information increases consumer well-being, such as knowledge that a food contains 160 calories or 60% of the recommended daily dose of vitamin C.
Some companies, however, use food labels to exploit this knowledge gap by preying on consumer concerns about a certain ingredient or process in order to collect a premium or increase market share. One of the ways they do this is by providing fake transparency through so-called absence labels (like “does not contain”), which are increasingly found on products that could not possibly have the ingredient in the first place.
While the water example I mentioned earlier is the most clear-cut illustration of this, others only require a bit more knowledge to see that they don’t serve a purpose.
Since federal regulation requires that hormones not be used in pork or poultry, advertising a chicken breast as “hormone-free” doesn’t make sense – yet doing so allows a company to charge more or help its products stand out from the less-labelled competition.
The FDA allows a business to use the phrase as long as the label also notes that “federal regulations prohibit the use of hormones.”
Vermont was the first state to require labelling of GMOs in 2016. AP Photo/Wilson Ring
A new law that makes GMO labelling of some foods mandatory will likely compound these problems once it takes effect in the summer of 2018.
To understand why, let’s return to asymmetric information and a related economic theory called the signalling effect. A signalling effect occurs when a buyer receives an implicit message from an explicit cue. For example, a food labelled “low sodium” may implicitly communicate that salt should be avoided. When the government is involved in the signaling effect, such as when a label is mandatory, the impact tends to become stronger.
Thus the new GMO labelling law is bound to signal to consumers that bioengineered foods are somehow bad. While some countries have banned the use of GMOs, such as in Europe, the FDA has said that “credible evidence has demonstrated that foods from the GE plant varieties marketed to date are as safe as comparable, non-GE foods.”
As a result of the new law, companies selling products without GMOs will likely slap “GMO free” on the label even though the law doesn’t apply to those foods.
My worry is that consumers will become ever more mystified as more businesses make increasingly absurd claims on their labels so that their products stand out from the competition in the grocery store aisle. I expect that the only thing consumers will get in return for these “fake transparency” labels is a higher price tag.
Brandon McFadden is an assistant professor of food and resource economics at the University of Florida. This article originally appeared on The Conversation, and is republished under a Creative Commons licence.
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