What is government’s role in public safety?

The question of how to deal with dangerous goods or services is a knotty one. Two recent incidents illustrate this complexity.

The first is the well-publicized pet deaths caused by adulterated gluten imported from China by pet-food manufacturers. Tainted Chinese toothpaste that caused human deaths elsewhere and lead-painted toys are part of the same phenomenon.

The second was the tragic accident in which a young girl sat on the drain of a wading pool at a local golf club. The cover of the drain was apparently loose or missing, and the powerful suction pulled out some of her intestines, causing grave permanent injury.

These cases involved people suffering from perils of which they were unaware. Three months ago, few pet owners worried their dog or cat would be poisoned by a toxic substance fraudulently added to a feed ingredient. Few parents worried that a child might be disemboweled playing in a swimming pool.

Economists differ on the proper role of government in preventing such harm. Those who believe that “government is not the solution, government is the problem,” think that role is limited.

The basic argument is that companies have a market incentive to produce safe products. If they do not, consumers will shun them and turn to competitors who do focus on safety. Supply and demand will create adequate incentives. Government need not take any action.

A more nuanced view along the same lines holds that well-defined property rights, coupled with an efficient court system, can provide correct incentives for safety. If property rights and responsibilities are defined such that a producer is legally liable for harm produced by a dangerous product, producers will focus on safety to avoid liability judgments.

Insurance companies can play a role here. An insurance company that will be on the hook if a judgment is entered against one of their clients can condition coverage on the client following procedures that will minimize the chance of producing bad products.

The insurance company is a private firm that has an incentive to act as an inspector or regulator to see that the client is doing what it ought to do under the terms of the policy. But as a private firm, it can be more flexible and efficient than a government agency.

Economists who see a more positive role for government argue for state and national regulation to ensure product safety. Governments should write electrical, plumbing and other safety codes and hire inspectors to make sure such codes are followed.

Government inspectors, they argue, should establish a system of sampling and analyzing food for purity and safety.

Which of these approaches is best?

The “let the market rule” strategy could work if everyone had good information about the degree and source of harm in products. This is seldom true for food, nonprescription drugs or cosmetics. People can eat tainted food, or give it to their pets, and not see any immediate connection to some resulting illness. Even when it is clear that illness is due to food contamination, it may not be obvious which food item is responsible. Conditions in the meat industry described by Upton Sinclair in “The Jungle” a century ago came about in an unregulated market.

The key problem is that diffusion of information about relative safety of different products is imperfect at best, so it isn’t always easy for consumers to choose safer products or shun dangerous ones.

Moreover, it is difficult to pursue liability suits across national borders, especially into a developing country like China. Yes, if U.S. distributors of imported products face strict liability, they will have an incentive to be careful about what they import. But information problems are considerable.

The “government should regulate” approach has more supporters, but it too is imperfect. Domestically produced food and drugs are inspected, although funding for food safety has shrunk in recent years. Illness from regulated U.S. food producers remains common. Much imported food receives little inspection at any stage of the production chain.

There are government standards for some pool components and state codes cover pool construction. Yet these standards did not prevent several tragic injuries like the recent one. Legislation mandating new safety standards for pools passed the Senate Commerce Committee last week.

The de facto exemption of imported food and ingredients makes no sense from an economic or health point of view. Yes, trade in food gives us more dietary variety and lowers food costs. Yes, sanitary issues often are used as a cover for protectionism. But something must be done to eliminate the disparity between safety of domestic and imported foods.

We will never eliminate all harm from unsafe products. No policy to ensure safety is perfect, but a combination of approaches can reduce risks considerably.

© 2007 Edward Lotterman
Chanarambie Consulting, Inc.