Friday, September 19, 2008

Oh, Baby! Who is to blame?

China's official news agency says that the tainted milk powder crisis "reflected chaotic industry conditions, as well as loopholes in the supervision and management of the industry". Was this horrible act attributable to greedy businessmen who will do anything (including poisoning babies) to make a buck? Hmmmm. Maybe. Is more government oversight the answer? No.

This sad disaster is a result of the incentives present in an institutional context of collective ownership and the presence of a highly regulatory bureaucracy that makes a practice of handing out privileges and restricting competition. In a competitive market of private enterprise, companies that poison babies are out competed by those that don’t poison babies. Market incentives exist to report wrongdoers and for companies to take extensive precautions against contamination all kinds. Protecting customers is a profit maximizing strategy when a firm can capture the benefits of doing so. This does not mean that foods will always be 100% safe in a free market. There is an optimal level of food safety. However, I am sure that the optimal level includes not poisoning your consumers or their babies.

1 comment:

Justin M Ross said...

I can say as a parent, that a firm who isn't careful with what they distribute gets a full boycott. My wife and I actually buy products from companies who boast their reputation on another independent child safety testing agency. When the whole "poison paint" scare happened last year, they sent us an email reminding us that they don't rely on U.S. regulatory agencies.