The recent brouhaha regarding StarLink genetically modified corn is like manna from heaven for those of us who teach introductory economics. It is hard to think of a better real-world example of external costs, one of the most important concepts in economics.
The facts are pretty straightforward. Aventis, the European pharmaceutical and chemical giant formed less than a year ago by the merger of German Hoescht and French Rhone-Poulenc, sold seed for a genetically modified corn to U.S. farmers for planting last spring.
The corn had been modified to be resistant to certain insects that would otherwise be controlled only by application of a chemical insecticide. The particular genes inserted into this strain of corn came from the peanut plant.
It was unclear whether corn so genetically modified might trigger severe reactions in persons who are allergic to peanuts. The firm initiated procedures to receive U.S. government approval for any use of the corn, including as human food, but such approval was not granted prior to planting time.
The EPA did grant approval for the corn to be grown for use as livestock feed but failed to verify that reliable measures were in place to ensure that StarLink corn would be segregated from other yellow corn, a generic commodity if there ever was one.
The seed was sold extensively in Iowa, much less so in other states. One of the seed’s retailers, Garst Seeds, maintains that it warned farmers who bought StarLink seed that the corn produced could be used only for feeding livestock and should not be sold into commercial channels.
According to news accounts, many farmers said warnings were accompanied by a wink and a nudge, together with advice to the effect that “the government hasn’t approved it for human use yet, but this is just red tape and it will be OK by harvest time.”
In any case, substantial quantities of the resulting corn moved into commercial channels, and from there into human food products. Taco Bell was forced to recall millions of dollars worth of taco shells from grocery stores when the StarLink gene was discovered in its products. Food sold in the corporation’s restaurants was not affected, but sales fell off noticeably.
Since that initial discovery the corn has been discovered in other food products and in export shipments to Japan and Europe. The timing has coincided with a renewed European uproar about mad-cow disease and contaminated beef. To many observers, the incident has led to a sharp drop in corn exports at a time when farm prices are already low.
It is not an exaggeration to say that all hell has broken loose in the field of corn. Farmers are suing Adventis and Garst Seeds for lost sales. Taco Bell and other food manufacturers are suing for lost sales and recall expenses. State attorneys general have stepped in with orders requiring Adventis to facilitate the buying up of any StarLink corn at a price that will compensate farmers and elevator operators for any excess expense resulting from necessary special handling.
Any liability lawyers not already fully occupied with the Bridgestone-Firestone recall cases are flocking to the Corn Belt to work for one side or another. Adventis’ costs will certainly run into the hundreds of millions, perhaps billions, of dollars. The firm recently announced that it was withdrawing from agricultural biotechnology all together.
What lessons can we learn? First, modern technology can amplify external costs almost exponentially. External costs, such as pollution, are costs to society from producing some thing that are not paid by the entity doing the producing. Since the person making the cost-benefit decisions faces only a portion of the cost, more is produced than is good for society as a whole.
External costs have always existed. Environmental lawyers cite cases of leather tanneries polluting streams in 13th century England. But until this century even the worst polluters, such as heavy metal smelters, affected people within a radius of some dozens of miles. It was bad for the affected households but seldom affected an entire state.
Applying chemical technology, and now genetic engineering, to agriculture caused measurable contamination to be spread across entire states. It is hard to find a potable water source in the Corn Belt that does not contain some trace of triazine herbicides. And in one year, one firm with one genetically modified seed apparently can contaminate food for millions of households and affect the price of a commodity grown by some 300,000 farmers with a value of tens of billions of dollars.
It is important to note that there is no evidence that the special genes in StarLink corn have harmed any specific person. But caution certainly was justified, and the requirement for government approval was reasonable. The U.S. has more favorable policies toward adoption of genetically modified organisms than any other industrialized countries, but even those minimal restrictions broke down.
Society certainly would benefit if more corn could be grown without use of chemical insecticides. But the premature and haphazard introduction of this innovation has resulted in costs to society that will outweigh any such benefit for years to come.
Adventis, Garst, farmers, grain handlers and consumers all lose. Technological innovation can be wonderful, but the potential for external costs to society is huge.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.