November 18, 2008
November 18, 2008
The BBC reports that the European Commission has scrapped rules that prevent oddly-sized or misshapen fruit and vegetables being sold in Europe. The EU’s agriculture commissioner called it “a new dawn for the curvy cucumber and the knobbly carrot.”
Proponents of the scrapped rules say they were introduced to ensure common EU standards. Critics decried the rules as examples of Euro-madness. If the rules were madness, then surely everyone would have voted to scrap the rules. Instead, the BBC’s blog notes that that 16 countries–mainly the big fruit and vegetable producers–voted against scrapping the rules.
If the rules were such Euro-madness, why would 16 countries vote to continue the madness?
Economists know that there was a method to the madness: the rules were designed to increase food prices and, in turn, producers’ profits.
How can beautiful fruits and vegetables increase food prices?
Adam Smith noted that meetings of people in the same industry usually result in “some contrivance to raise prices.” The contrivance is usually some agreement to restrict output, thereby force consumers up their demand curves to pay higher prices.
In an article published by the Journal of Law and Economics, Eric Fruits and his co-authors show that many agricultural cartels in the U.S. raise the prices for their crops by imposing quality restrictions on output. Produce that is too small or misshapen is not allowed to be marketed by cartel members. Such rules raise prices in two ways:
1. Higher quality produce is more desirable to consumers. Consumers are willing to pay more for a larger beautiful melon than for a small ugly one.
2. Because some produce does not “make the grade,” quality restrictions reduce the amount available for sale. If only “large” melons can be marketed, then the total number of melons for sale shrinks. The reduced supply of produce results in higher prices.