Certification and labeling: more or less acidic?

The introduction of the Nutri-Score as a health indicator on products and numerous chain schemes such as 'On the way to PlanetProof' and 'Better for cows, nature' and 'Farmer for sustainability' are indispensable. Almost one in six euros is paid in the supermarket under such a logo. It doesn't stop there. For example, the European Commission refers to certification and labeling as one of the starting points for developing the Farm-to-Fork strategy.

Certification and labeling are two different processes. Labeling is distinguishing the product towards the consumer so that he can make a distinction in his purchase decision. This often requires certification in the chain, but you can also certify for other purposes. Think of the APK inspection in which cars are provided with a certificate that they have been tested for safety and the environment and can go on the road again for another year.

Economists see certification and labeling as a failure of the information market. Behind this lies the failure of the product market, in which some producers feel compelled to take too little account of food safety or the environment. If the buyer knew that, he could have ignored those products and manufacturers. This is where the information market fails: you cannot tell from the product that it is not good enough.

The chance and cost of a bruise
The American economist George Akerlof described this beautifully in 1970 on the basis of the used car market in his famous article The Market for Lemons. He explained that it was not only sour for the buyer if the car turns out to be defective, but that he also wants to pay less as a result. The buyer takes into account in his bid price the probability and costs of a bruise. Hence the lemons in the title of the paper, that's American slang for such a bad buy.

And because the seller is aware of the quality, he decides to continue driving a car without defects because he gets too little for it. Due to this asymmetry in information and the buyer's doubts about whether the seller is telling the whole truth, the market for good-quality used cars disappears. This is unfortunate for both parties and lowers prosperity. You can try to solve it by adding the information, such as the BOVAG quality mark in which an independent organization inspects the car and provides it with a certificate.

Create your own market
The growth of certification and labels is of course not only a result of this article by Akerlof. Consumers sometimes differ greatly from each other in what they want and what they are willing to pay for. And producers try to distinguish themselves from each other and create their own market. This is where brands and labels come together.

Even if the market for sustainable, labeled food is still growing, the question is whether you will get there by improving market forces alone. Consumers must have the money and be willing to pay it for the better product. Perhaps they do that more easily for one aspect (animal welfare, for example) than for the other. Certification is also not free, some farmers are mad about all those checklists and if the schemes are linked to certain companies in the chain, farmers become more dependent on them and it is more difficult for them to switch. Which in turn gives those chain parties a duty of care.

Freedom for farmer how he achieves goals
Perhaps the government should therefore increase the minimum requirements in the market instead of relying on the consumer who makes the right choice with the added information. I personally see a lot of in-between: one company certification on a complete set of issues that determines compliance with numerous government standards and subsidies. The farmer is given the freedom to determine how he achieves the goals. After all, with certification it is much easier to pay attention to the specific circumstances and technology of a company than with a general means prescription.

You can award extra stars to companies that already meet future climate or biodiversity standards. Chain parties can then be obliged to pay the additional costs of that production, so that banks and lessors can see that the more sustainable companies are not sour lemons in long-term financing. And retailers who want to put a head on for their own label and thus let the consumer pay with it, can continue to do so quietly. The European Commission should take a serious look at it.

Krijn J. Poppe

Krijn Poppe worked for almost 40 years as an economist at LEI and Wageningen UR and now holds a number of advisory and management positions. For Boerenbusiness he dives into his bookcase and discusses current developments on the basis of studies that have become classic.

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