Bundling Public and Private Goods: The Market for Sustainable Organics

Margot J. Pollans

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I.
The Need for Sustainable Agriculture

Advocates of alternative agriculture argue that conventional modes of agricultural production are problematic because they ignore natural limits. The goal of sustainable agriculture, a form of alternative agriculture, is to farm in accordance with the structure of local ecosystems. This “nature as standard” approach requires tailoring farming techniques to local soil and local climate; in other words, farming methods (including crop choices) must be consistent with local ecosystems. This approach also requires acknowledging the complexity of ecosystems and attempting to work within their constraints rather than ignoring or attempting to control them.

Under the “nature as standard” mandate, modern farming is not sustainable. In addition, farming in accord with a sustainable approach would curb many of the environmental externalities of current methods. Though agricultural productivity has increased dramatically in the last sixty years, this increased productivity has come at the price of increased environmental externalities, which economists estimate may cost society as much as forty percent of per acre farming profit, or somewhere in the range of $5.7 to $16.9 billion per year. These externalities include land degradation, destruction of biodiversity, and pollution of air, soil, and water.

Most farmers do not adopt sustainable methods because they increase the costs of production, whereas the costs of environmental impacts are external to agricultural operations. This type of market failure has justified governmental intervention; however, traditional environmental regulation, under both command-and-control regulation (including the Clean Water Act, the Clean Air Act, the Federal Insecticide, Fungicide, and Rodenticide Act, the Toxic Substances Control Act, and the Resource Conservation and Recovery Act) and information disclosure regulation (including the Comprehensive Environmental Response, Compensation, and Liability Act and the Emergency Planning and Community Right-To-Know Act) treats agriculture with a light hand, often exempting it explicitly. In addition, right-to-farm laws, protecting farming operations from encroaching residential development, spare many farming operations from environmental controls that might be imposed by nuisance suits.

These exemptions, which have forestalled the kind of environmental improvements that environmental laws have forced in other industries, are the result of both technical and political realities. Technical difficulties stem from the fact that farms are nonpoint sources of pollution, meaning it is nearly impossible to trace pollution to particular sources and to monitor their outputs. These difficulties create a roadblock to enforcement of environmental laws. In addition to technical difficulties, the agricultural lobby is well organized and politically connected, and has been very successful at preventing expansion of environmental regulations.

The environmental externalities allowed by the exemptions in environmental protection laws are compounded by the Federal Farm Bills, which authorize the federal agricultural subsidy system. The Farm Bill programs have encouraged environmental degradation by favoring monoculture and overproduction. As with environmental regulation, there is little political will to rework the subsidies system. Indeed, the system itself has created a powerful constituency with an enormous financial stake in its perpetuation.

 
II.
The Organic Food Production Act

In 1990, Congress passed the Organic Foods Production Act (OFPA or “the Act”), which created an organic food certification and labeling system—the National Organic Program (NOP). The OFPA is one of the few federal laws that regulates pollution from farms. The statute, a type of information regulation, creates standards for organic labeling. While the OFPA’s primary purposes are to facilitate the growth of the organic sector and to protect consumers, it also has a secondary purpose, underimplemented by the United States Department of Agriculture (USDA), to foster sustainable farming practices.

Organic labels are an example of eco-labeling—labeling that identifies positive environmental attributes of a product. The theory of eco-labeling is that “information creates demand in favor of environmentally friendly products. Such demand will provide incentives for producers to produce environmentally friendly products to gain a larger market share.”1 As market regulation, the OFPA has been successful by a number of measures. Primarily, the USDA measures its own success by the growth of the number of certified organic producers; indeed, the organic market has seen steady growth. The USDA appears to have achieved its and Congress’s stated goal of developing the nascent organic industry, a goal lobbied for by the organic trade organizations. However, in light of the pressing need for environmental regulation of farming and the political difficulties in passing agricultural command-and-control legislation or closing the loopholes in existing statutes, it is imperative that the USDA implement the secondary sustainability goal of the OFPA. To do so, it must address three problems with the current program.

First, there is only a weak relationship between the requirements of the organics program and the goal of sustainability. The organic label conveys information about only a narrow subset of sustainable agriculture practices. The NOP overemphasizes inputs, for which it establishes loose standards, and underemphasizes other sustainable practices, for which it establishes few specific requirements. But these problems are not an inevitable result of the form of the statute. Instead, many stem from implementation decisions made by the USDA, which at the time of the creation of the NOP placed a substantial emphasis on the goal of growth of the organic sector rather than on the development of sustainable agriculture.

Second, the legitimacy of the program is threatened by consumer misperceptions and mistrust. Consumers commonly cite lack of trust in the organic label as a reason not to pay the price premium for organic products. Insufficient enforcement of labeling requirements poses a serious threat to program legitimacy and effectiveness. There is substantial evidence that the USDA has been ineffective at enforcement. Publicity about such lack of enforcement may depress demand. Consumers also have insufficient knowledge about the meaning of the current organic label and the environmental impacts of organic farming. Many consumers unjustifiably believe that organic foods are better for the environment and have substantial health benefits. Ultimately, many consumers believe that the organic label offers a product quality guarantee, when it actually conveys information solely about production processes.

Third, and most importantly, even if both of these structural issues were addressed, the OFPA would still face numerous hurdles because of the state of consumer preferences. Success of information regulation is measured by the extent to which it changes consumer behavior. For example, information regulation designed to improve the safety of a table saw is effective only if the user of the saw reads the safety warning and follows the instructions that it provides. Similarly, an information regulation program designed to incentivize sustainable agriculture must increase the demand for those products (thereby inducing more producers into the market); it will do so only if consumers are willing to pay for the benefits of those products.

 
III.
Bundling Public and Private Goods

Currently, consumers are not willing to pay for sustainability. Sustainability is a public good. Like other public goods, it is subject to a freerider problem. A rational consumer would not pay the price premium for sustainability because the benefits accrue to everyone, not just those who pay for them. If all consumers recognize that they can freeride, then only the consumers with altruistic motives will pay.

The same problem should arise with organic goods. Why, then, has the organic market share grown so rapidly? In making food-purchase decisions, consumers are motivated by a number of different values that govern willingness to pay. Although consumer studies find that environmental concerns do correlate with willingness to pay higher prices for organic foods, environmental interests fall far behind the other motivating values of health, including safety and nutrition, taste and price. Health is consistently identified as the primary factor. A consumer may be willing to pay for a combination of reasons, or a consumer may pay for health alone. Because the organic product bundles environmental benefits with health benefits, pure altruism is not required for consumers to be willing to buy organic.

The USDA could transform the OFPA and mitigate its current shortfalls by taking advantage of the fact that organic products inherently bundle sustainability (a public good) with health (a private good). The latter has the largest impact on the willingness of consumers to pay more for organic products. By taking advantage of this bundling, the USDA could address the current shortfalls of the NOP and increase the environmental benefits of organic production without risking a decline in market share. Bundling falls into two general categories. First, all eco-labeling involves bundling of a public good with a private intangible benefit. For instance, post–consumer product toilet paper both benefits the ten-thousand–year-old forests in Northern Canada and provides the consumer a sense of satisfaction from having done something good for the environment. This latter private benefit—what I will call a “trend benefit”—can have two parts: the good feeling the consumer experiences from upholding a social norm (“self-conception” benefit) and the good feeling he experiences in being seen doing so (“reputational” benefit). This trend benefit is important for organic foods. Many people derive pleasure from being seen at the farmers’ market or in the organics aisle. With some environmental benefits, consumers may even experience a sense of shame associated with not taking the environmentally friendly action.

Of course, because of price premiums and other disincentives (such as inconvenience) to environmentally conscious behavior, this private good—reputation—is unlikely to be enough, on its own, to make eco-labeling successful. The extent to which social norms can transform the public good of sustainability into the private good of reputation is limited. A more valuable, and perhaps more tangible, private good is required. Thus, the second type of bundling combines a public good with a separate private good (rather than an intangible private benefit), such as financial savings or health benefits. For instance, the Energy Star program offers consumers an opportunity to make environmentally sound decisions and save money at the same time. The program bundles reduced fossil fuel emissions with savings on energy bills.

The question remains whether bundling is a normatively desirable way to achieve sustainability. Consumers have a growing interest in buying organic. Despite misinformation about and mistrust in the organic label, the market share of organic foods continues to grow. The alternative to bundling is to create a separate labeling system specifically for sustainability benefits. However, a dual system that separates organic from sustainable would splinter the current organic market. Those interested in health (the majority of organic purchasers) would stick with organic, while only those interested in the environment would switch over to sustainable.

It is possible that two separate systems would maximize opportunity for consumer choice, but the benefits gained by allowing such choice would be outweighed by lost efficiency. First, these two groups of consumers overlap. Splintering the program might force some people to choose for which benefit—their own health or the health of the environment—they would prefer to pay. Second, unbundling may not be entirely possible. While they are not completely in sync, often changes to farming that produce environmental benefits also produce health benefits. For example, reduction of pesticides is good for the environment because it reduces pollution of ground water from runoff and may also be good for health because it reduces exposure to potentially harmful chemicals. In other words, bundling increases the values of both the public and private goods.

In addition, two further characteristics of the NOP mitigate any possible normative concerns about bundling. First, consumers are getting what they pay for; that is, the private benefit is real. So long as the private benefit is present, there is no reason to be concerned that consumers are also getting a public sustainability benefit (which many consumers would agree is desirable, even if they do not want to pay a premium for it). There is evidence that organic foods have health benefits, although the extent of the benefit often depends on the particular type of produce and the extent to which that type of produce absorbs pesticides that are applied to it. This element is especially important where environmental and health benefits are totally in sync (i.e., where unbundling is completely impossible). Under this circumstance, the entire price premium could be attributed to health benefits, while the environmental benefits are a free bonus.

The less environmental and health benefits are in sync, the more the producer will face increased costs solely for the purpose of provision of the primarily public good. Under this circumstance, a second characteristic—transparency of the public good—is extremely important. Producers and marketers must be honest about the existence of the public benefit. There is no question that organics have been marketed as sustainable products; the public good is not hidden. Organic producers emphasize environmental benefits in their packaging, and organic trade associations emphasize these benefits in their literature. Consumers are likely well aware that the goods they are purchasing may have sustainability benefits.

Transparency is also important because it fosters choice; consumers can opt out of the organic market and seek health benefits elsewhere if they do not want their private health benefits bundled with public sustainability benefits. In the light of fostering choice, bundling also appears as a favorable alternative to other types of environmental regulation. For instance, a command-and-control system, while advantageous from the perspective of making greater environmental strides more quickly, eliminates choice: Consumers would not be able to opt out.

 
IV.
Bundling Under the OFPA

By taking advantage of the potential of bundling, the USDA could improve the program’s sustainability effects. Because sustainability was not the primary goal of the program and has never been directly implemented, bundling is an unintended characteristic of the NOP. The USDA should explicitly adopt sustainability as an essential purpose of the organic program. This shift is statutorily permissible because of the flexible language of the OFPA. In addition, in light of growing environmental consciousness among Americans, the shift may eventually be mandated by the marketing mission of the statute. The shift is normatively desirable because of the need to address the environmental externalities of agriculture and the lack of other regulatory options. Bundling makes the shift economically feasible.

Having adopted this goal, the USDA should make at least some of the following changes to the program. Several essential changes could be implemented without any statutory amendments. First, the USDA should improve enforcement practices. The Secretary has substantial discretion to enforce the Act more stringently. To do so, the USDA would need to increase the accountability of certifiers, who are the critical liaison between the USDA and organic farmers and are in a unique position to tailor requirements to local circumstances—an element that is essential to sustainability. Certifiers currently have broad discretion to shape organic plans and to hold farmers accountable for adherence to those plans, but certifiers currently have little incentive to develop stringent plans. The USDA could promulgate national regulations that would require certifiers to have knowledge of sustainable farming practices and would expand the circumstances under which the USDA would revoke certifier accreditation.

Second, the USDA could bolster standards for inclusion on the list of synthetics that organic producers are allowed to use. The statute is open-ended with regard to these standards, so the Secretary could develop narrower inclusion requirements and exclude those synthetics that pose the greatest threat to natural resources.

Finally, the Secretary could strengthen requirements for organic plans. While the Act contains several specific requirements for the content of the plans, it does not limit the content to those requirements. The law also allows the Secretary of Agriculture to identify “necessary” conditions for program participation. The USDA could add greater stringency and sustainability to the certification process by adding a requirement that farming methods be consistent with local ecosystems. This requirement would ensure that organic farming aligns with local ecosystems and adheres to a “nature as standard” approach. A farm’s organic plan should reflect the specific environmental context of the specific farm and require farming techniques suited to that context. The requirement could read: “The certifier must require that the Organic Plan reflect farming practices that, if used over time, could continue without substantially impairing the local environment.”2 Such a requirement is flexible enough to account for a wide range of farming conditions but specific enough to ensure organic farming would have fewer negative environmental externalities.

Changes to the program requirements would close the gap between organic and sustainable and an increase in enforcement would give the label more legitimacy. However, making these changes would also increase the cost of organic production and the price premium on organic products. Therefore these changes might also reduce demand and exacerbate the freerider problem. Thus, before making any or all of these changes, the USDA should consider how they would impact consumer demand for organic products. To ensure that making these changes would not decrease the NOP’s net environmental benefits, the USDA should take advantage of bundling. A decrease in net benefits could occur because an increase in price might drive down demand and, ultimately, supply. Before making any changes, the USDA should attempt to answer the empirical question of whether a decrease in production accompanied by an improvement in sustainability of the remaining production would lead to a net gain or net loss in overall sustainability. In addition, the USDA should make these changes incrementally, paying close attention to market responses so as not to exceed the market’s tolerance for regulatory change.

In deciding which changes to prioritize, the USDA should mitigate the freerider problem through bundling. It should analyze the extent to which these recommended changes would also improve the quality of the private health benefits associated with organic produce and thus offset declines in demand resulting from increased prices. Such an increase in private benefits may increase willingness to pay, despite increased cost of production. Similarly, improvements to standards for certifiers and changes to Organic Plan requirements to increase the extent to which products are tailored to local environments might increase the trend benefit for consumers who value local products. By evaluating possible changes through the bundling framework, the USDA could minimize loss of market share that might result from increased prices.

In making and promoting these changes, the USDA can also contribute to a positive feedback loop. Information regulation can increase consumer awareness, which may in turn foster a higher willingness to pay for organics. Further, to the extent that environmental consciousness becomes a more prevalent social norm, the reputational effects of environmentally friendly decisions will be stronger, and the private good element of sustainability may also become stronger. As trend benefits increase, the line between the public and private goods associated with a product becomes fuzzier; the public good itself begins to offer a private benefit. As that happens, the organic standards could be strengthened without fear that the resulting increase in the price premium would drive down demand.

 

Conclusion

Organic labeling should be a tool for promotion of sustainability, and bundling of public and private goods could make it effective as such. Bundling makes it possible to overcome the freerider problem associated with the marketing of pure public goods. In the future, greater environmental consciousness may make sustainability a private as well as a public good, augmenting (and perhaps eventually replacing) the bundled-in private goods such as health benefits. In the meantime, the latter type of bundling is essential to the success of organic labeling as a tool for fostering sustainability.

Acknowledgments:

Copyright © 2010 NYU Law Review.

Margot J. Pollans received her JD from New York University Law School in 2010.

  1. Richard B. Stewart, A New Generation of Environmental Regulation?, 29 Cap. U. L. Rev. 21, 135 (2001).
  2. This provision should be accompanied by a list of guidelines from which certifiers could draw, including guidelines as to which crops can be grown in which parts of the country and which crops should be grown together. Guidelines should aim to minimize the use of monoculture and promote the other sustainable farming techniques described above.

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