Local and Global Welfare When Regulating Organic Products

Local and nonlocal producers compete only in the local market regarding selling conventional and organic products. Local producers incur variable costs related to reducing the risk of damage resulting from their new organic production methods. A local policymaker maximizing local welfare chooses either a regulation that is imposed on its local producers via production requirements or on all local and nonlocal producers via retail requirements that directly affect consumption. We show that local regulation is selected for relatively large values of damage. In this case, the organic regulation is influenced by whether the damage is incurred by residents and the environment close to the production site or by consumers. If the damage is incurred by residents and the environment close to the production site, only regulations targeting the local producers are selected, which improves the profits for nonlocal producers. Concerning damage incurred by consumers after their consumption, each type of regulation is selected depending on the cost of the safe technology, but the regulation targeting the consumption level harms nonlocal producers.