Public and Private Goods

The Canadian National Livestock and Poultry Traceability Program

Alternative formats

Jill E. Hobbs, William A. Kerr (Department of Bioresource Policy, Business & Economics, University of Saskatchewan)
May T. Yeung (Estey Centre for Law and Economics in International Trade)

August 31 2009

Table of Contents

• Executive Summary
• 1.0 Introduction and scope of project
• 2.0 Defining public and private goods
• 3.0 The provision of public, private and mixed goods
• 4.0 Public, private, toll and club goods in the canadian livestock and poultry traceability system
  • 4.1 Traceability Information as an Output: The Traceability Infrastructure
  • 4.2 Traceability Benefits as an Output
  • 4.3 Implications for the Governance and Funding of a National Traceability System
• 5. Implications and conclusions
  • 5.1 Key Insights from the Analysis
  • 5.2 Lessons from Experience
  • 5.3 Suggestion for the Future
• Appendix - case studies
  • Case Study #1 - Agri-food Quality Control Programs
  • Case Study #2 - Agricultural Research
  • Case Study #3 - Irrigation in Alberta
  • Case Study #4 - Environmental Stewardship
  • Case Study #5 - Electronic Medical Records (EMR)
  • Case Study #6 - Verified Beef Program (VBP)
  • Case Study #7 - Parks Canada - Special Operating Agencies
• 6. References

Executive Summary

The Federal-Provincial-Territorial vision for a 'farm-to-fork' National Agri-Food Traceability System is to provide timely, accurate and relevant information to enhance emergency management, market access, industry competitiveness, and consumer confidence. An Industry-Government Advisory Committee (IGAC) was established to lead the development of the livestock and poultry components of the national traceability system. Within IGAC, the Cost-Sharing Working group identified a need to further understand the differences between public and private goods within the context of a national livestock and poultry traceability system. This report helps inform this discussion by (i) explaining the characterization of public goods, private goods, and goods with mixed features; (ii) identifying strategies commonly used to provide public and private goods, and (iii) assessing the proposed Canadian Livestock and Poultry Traceability system in terms of its provision of public and private goods.

What are Public Goods and Near Public Goods?

• Private goods are provided in the marketplace. Most goods or services are private goods, such as a cup of coffee, a book, a tractor or car repair services from a mechanic. Public and near-public goods are different because the private market incentive to provide these goods is weak - meaning they will only be supplied at sub-optimal levels from society's perspective. Hence, in the case of public and near-public goods the "market fails" and government may wish to intervene on society's behalf.
• Public goods and private goods are distinguished by two features: excludability and rivalry. Pure public good are both non-excludable and non-rival.
• Excludability refers to who can access (use) the good or service. Non-excludability means that once the good or service is provided to one individual it is impossible to prevent someone else from also using that good or service. Free-riding occurs. Excludability is usually determined by ownership (property rights).
• Rivalry refers to joint consumption. A good or service that is non-rival can be used by more than one person without reducing its availability to others, e.g. a radio signal.
• Public goods represent a 'market failure' because there is no incentive for private firms to provide pure public goods since anyone can 'free-ride' once the good is provided to one individual. Examples of pure public goods include national defence and technological know-how that is not protected by intellectual property rights.
• Goods that have mixed features are called near-public goods. A common pool good is rivalrous (like a private good) but non-excludable (like a public good). An example is ocean fish in international waters. Common pool goods suffer from depletion through over-use
• More relevant for traceability systems are toll goods and club goods. These are near-public goods that are excludable (like a private good) but non-rivalrous (like a public good). An example of a toll good is an uncongested toll road or toll bridge. Having one more car on the bridge doesn't affect the availability of that bridge to other drivers, but it is possible to control access to the bridge (exclude users). Toll goods are often funded through a blend of taxpayer subsidy and user fees.
• Club goods are also non-rivalrous but somewhat excludable. These are goods whose benefits are shared among a specific group of individuals (or firms) - the 'club'. The costs of providing the good are shared among the club, and the benefits are limited to club members. Private golf clubs are an example.
• Table 1 from the report (reproduced below), provides examples of private goods, public goods, common pool goods and toll goods distinguished by the two features of excludability and rivalry.

  Table 1: Classifying Goods Based on Degree of Rivalry & Excludability

  	Rivalrous	Non-Rivalrous
  Excludable	Pure Private Good e.g., Cup of coffee Books Machinery Privately owned agricultural land	Toll Good (Club goods) (Public or private provision) e.g., Toll bridge Cable TV signal Sports events Parks Public lectures Protected know-how
  Non-Excludable	Common Pool Good (Collective goods) e.g., Ocean fish Wildlife	Pure Public Good e.g., National defence Radio signal Scenic view Unprotected know-how

How are Public and Near Public Goods Funded?

• Pure public goods are usually provided by the government and financed from tax revenues.
• Toll goods can be either publicly or privately provided and often result in the creation of monopoly power. Sometimes toll goods are provided by the public sector and funded either entirely through user fees or through a combination of user fees and taxpayer subsidization (e.g. public buses). Alternatively, private firms may provide the good or service with regulatory oversight to regulate the price or the rate of return (e.g. regulated electrical utilities).
• Different funding options result in different economic outcomes in terms of the distribution of the cost burden between taxpayers and users of the good or service. There is no magic formula for determining the optimal balance between the two; it depends on the relative weight that society (or its decision-makers) places on these two groups. The appendix to this report provides case study examples.
• Club goods are funded through shared costs among members. Challenges include establishing an effective means to collect user fees and the transaction costs of arriving at consensus among club members

Application to Traceability

• The classification of private, public, toll and club goods within the traceability system takes two perspectives: (i) the traceability information itself, including the infrastructure that delivers that information; and (ii) the key 'benefits' or outcomes of a traceability system
• (i) Traceability information per se is a toll good. The information can be made excludable by establishing rules for authorized access to the data. It is non-rivalrous in the sense that more than one (authorized) user can use the same piece of information without reducing its availability to others.
• As with other toll goods, public or private provision (of the traceability infrastructure) is possible. However, private provision would vest significant monopoly power in the owner of the traceability infrastructure. This is a persuasive argument for public sector intervention, which can range from regulation of private provision through to public provision funded solely through user fees or a combination of user fees and taxpayer subsidization.
• Key questions include: who are the 'users' (beneficiaries) of the traceability system; is it possible to collect user fees; is taxpayer subsidization necessary to induce provision of the traceability system?
• (ii) The NAFTS vision statement is used to identify the key 'benefits' or outcomes of a traceability system, namely: emergency management, market access, competitiveness, and consumer confidence.
• Table 2 from the report (reproduced below) categorizes these benefits in terms of their private good, public good and near-public good (in this case, club good) characteristics. 'The club' in this context is the livestock and poultry industry as a whole.
  

  Table 2: Classifying the Traceability System Based on Degree of Rivalry & Excludability.

  	Rivalrous	Non-Rivalrous
  Excludable	Pure Private Good Product differentiation Individual firm or supply chain competitiveness Supply chain efficiencies	Toll Good Traceability information
  Somewhat Excludable (Club)		Club Good Livestock disease emergency management (non-zoonotic) Increased market access Industry competitiveness Industry reputation
  Non-Excludable	Common Pool Good (Collective goods) (Not applicable)	Pure Public Good Emergency management for zoonotic diseases Safer food supply system Consumer confidence

• The challenging aspect of the traceability program is its potential to deliver a blend of public, private and near-public goods.
• Most of the significant benefits that will likely flow from a national traceability system fall into the club good and pure public good categories.
• Club goods are usually funded from within the club through cost-sharing arrangements that reflect the collective benefits received by the club. Typically clubs are subject to rising organizational and transaction costs as club size increases, making consensus on the appropriate level of user fees, appropriate strategy for the club, etc. difficult to achieve. An obvious challenge in this case is that 'the club' spans multiple livestock and poultry species and multiple levels of the supply chain. Thus while there may be clear collective benefits to adopting a national traceability system, getting all players "on side" will be challenging. This in itself is a form of market failure necessitating some form of public sector intervention (even beyond the recent decision to mandate livestock and poultry traceability) to facilitate adoption and ensure compliance (e.g. grants to fund technology and facility upgrades, training, etc.).
• Pure public goods involve greater levels of public sector involvement due to a more pronounced market failure. A safer food supply system, consumer confidence, and emergency management for animal diseases that are transmissible to humans (zoonotic diseases) have the features of pure public goods. In the first two cases (less so for zoonotic diseases), the public good benefit is only likely to be forthcoming once a full national ('gate to plate') agri-food traceability system is in place. However, the livestock and poultry birth-to-slaughter traceability program is a necessary prerequisite for a full chain traceability system. This suggests the need for public sector funding towards the cost of establishing the traceability infrastructure for a livestock and poultry traceability system which would be the foundation for a more comprehensive agri-food traceability system.
• A full understanding of the likely size and distribution of the benefits and costs from a national traceability system would require a comprehensive quantitative benefit-cost analysis. This would be a major undertaking but would inform future policy decisions on this issue.

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1. Introduction And Scope Of Project

In June 2006, federal, provincial and territorial agriculture ministers committed to phasing-in a National Agriculture and Food Traceability System (NAFTS), beginning with livestock and poultry. The vision for a 'farm-to-fork' NAFTS is to provide timely, accurate and relevant information to enhance emergency management, market access, industry competitiveness, and consumer confidence. An Industry-Government Advisory Committee (IGAC) was established to lead the development and implementation of the livestock and poultry components of the national traceability system, specifically:

• To prepare for and respond to emergencies including outbreaks of animal disease and food safety emergencies
• To enhance industry's competitiveness and ability to retain or capture market opportunities.

Within IGAC, the Cost-Sharing Working group identified a need to further understand the differences between public and private goods within the context of a national livestock and poultry traceability system. The purpose of this report is to inform that discussion. As such, the report has three main objectives. First, to explain the characterization of public goods, private goods, and goods with features of both public/private goods. Second, to identify strategies commonly used for the funding or provision of public and private goods. Finally, to assess the proposed Canadian Livestock and Poultry Traceability system in terms of its provision of public and private goods.

Many definitions of traceability exist[Note 1]. The range of definitions for traceability reflect the various functions that traceability systems may play, from emergency management, to enhancing supply chain efficiencies, to facilitating product differentiation. Traceability is sometimes defined fairly narrowly as the ability to trace back the movement history and/or origin of a product, while broader definitions of traceability also encompass information on production and processing methods applied to the product. For example, the ISO 9000:2000 Quality Management standard defines traceability in terms of the ability to trace the history, application or location of a product or ingredient, including the processing history and the location of the product after delivery (Golan et al., 2004). Smith et al. (2005) provide a useful distinction between identification, traceability, and verification, arguing that while it is usually easy to identify, it is often difficult to implement traceability and even more difficult to verify identity, traceability and quality claims. Other definitions distinguish between tracking and tracing functions within a traceability system, with tracing referred to as the ability to trace food, food ingredients and animals back along the supply chain, while tracking refers to the ability to track food and food ingredients forward in the supply chain, thereby facilitating quality assurances (Meuwissen et al., 2003; Schwägele, 2005). Traceability can refer to birth to slaughter traceability systems or full chain 'farm to fork' systems. Golan et al (2004) define traceability systems in terms of their breadth, depth and precision, wherein breadth is the amount of information the traceability records, depth refers to how far back or forward the system tracks; and precision refers to the degree of assurance or credibility with which the system can pinpoint movement of a specific product. It is beyond the scope of this report to attempt to define traceability within the Canadian context, but the range and scope of existing definitions inform our analysis of the public and private good aspects of traceability systems.

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2. Defining Public And Private Goods

This section outlines the key features of public versus private goods and presents the analytical framework that is used to assess components of the livestock and poultry traceability system. Economists have long recognized that, while normally markets are an efficient and effective means to provide an optimal allocation of resources, sometimes there is market failure. Broadly speaking, there are three ways in which market failure can occur: i) the presence of externality (or spillover) effects, (ii) in the presence of imperfect information; and (iii) in the provision of public goods. Since all three have potential relevance to a national traceability system, we provide a brief explanation of externalities and incomplete information before turning to public goods.

Externalities occur when there are costs or benefits that fall on others besides the buyers and sellers of a particular good or service. These are sometimes also referred to as spillovers or external benefits/costs. In the case of negative externalities, this means that the market price does not fully represent all of the costs of the good or service, resulting in too much of a good having external costs associated with it being provided by the market. The classic example is pollution. Suppose a factory producing textiles also generates a great deal of dirty waste water that is discharged into a river. The river pollution is a negative externality, reducing the value of the river water to downstream users who may have to pay to clean the water before use, or are prevented from using it. In other words, the private costs (to the firm) of producing textiles is less than the cost to society; the social costs include the pollution. Positive externalities (positive spillovers) occur when the market prices does not fully reflect all of the benefits of a good or service, resulting in too little of the good being provided by the market. An example is some types of health-care services. If I buy a flu shot, it not only protects me from sickness but also reduces the likelihood that I infect those around me. The social benefits of the flu shot outweigh the private benefits. Left to its own devices, the private market might under-provide a good with positive externalities (positive spillovers). As we shall see shortly, pure public goods are sometimes an extreme example of a good with positive externalities. The presence of externalities often results in government intervention in the market, e.g. to regulate or tax goods which create negative externalities, or public provision or subsidization of goods with positive externalities.

Market failure can also occur in the presence of imperfect information, in particular, information asymmetry. Information asymmetry occurs when one party to a transaction has more information than another. For example, a seller of a used car has more information about the true quality of the car than the buyer. Uncertainty over the quality of a used car will cause buyers to reduce the price they are willing to pay, which in turn will deter sellers of high quality cars from the market. In the absence of some mechanism for credibly signalling the true quality of used cars[Note 2], the market is said to self-select low quality cars. This is the market failure. In other words, information has value. Buyers will incur search costs in obtaining information about goods they wish to purchase, and sellers of high quality goods will incur costs in signalling the true quality of their product. Information asymmetry is particularly relevant for credence attributes. These are attributes (characteristics) of goods that buyers cannot detect even after purchase and consumption without some form of identification or labelling. In the agri-food sector credence attributes may include production methods (e.g. organic, 'animal-welfare friendly', 'environmentally sustainable') or source (local, Canadian-origin), or food safety[Note 3]. The role of a traceability system in addressing imperfect information (and the societal benefits that may flow from this function) is examined briefly in section 4, in particular, the extent to which there may be 'public good' aspects to the information provided by a traceability system.

The third type of market failure occurs in the provision of public goods. A pure public good is one which cannot be provided to one individual without it also being provided to others[Note 4]. In other words, for a pure public good it is impossible to prevent joint consumption. Pure public goods are an extreme case of a positive externality (a good with external benefits). Economists use two characteristics to classify goods as public or private: excludability and rivalry. Excludability means that it is possible for one person to prevent someone else from using the good. Private goods are excludable. Usually whether or not a person consumes the good (is the owner of the good) depends on whether or not he or she pays for it. Thus the owner of a good can limit access to it. A car is a private good. If I own a car I can prevent others from using it; a car is excludable. Similarly, if I own private land I can prevent others from using it[Note 5]. With goods that are non-excludable it is not possible to exclude others from consuming the good. The light generated by a lighthouse is non-excludable. Once provided to one person (ship) it is impossible for other people (ships) in the vicinity to be prevented from seeing (and benefiting from) the light.

Rivarly refers to the extent to which the use of a good by one person precludes its use by someone else. For example, if I consume my Grande Caramel Macchiato from Starbucks, that particular cup of coffee is not available for consumption by anyone else. It is a rivalrous good. A good that is non-rivalrous can be used by an additional person without reducing its availability to others. For example, a broadcasted radio signal can be used by more than one person without reducing its availability to others. Pure public goods have both features; they are both non-excludable and non-rivalrous. For example, national defence is a pure public good. Once a system of national defence is in place it is not possible to exclude an individual from the protection the system provides: it is non-excludable. An additional resident of the country benefits from the protection provided by a national defence system without reducing the amount of protection available to others: therefore it is also non-rivalrous.

The degree of excludability depends on the technological nature of the good and the definition and enforcement of property rights. The degree of rivalry also depends on the nature of the good, but may change with use. For example, an uncongested road or uncongested bridge are non-rival goods as use by one individual does not affect the availability of that road (or bridge) to others. However, as congestion builds on the road or bridge, it becomes somewhat rival: use by one more person reduces the availability to others. Not all non-rival goods are non-excludable, and vice versa. While an uncongested bridge may be non-rival, it is not non-excludable if it is possible for the owner of the bridge to charge a fee for use of the bridge.

Figure 1: The efficient Output of a Public Good versus a Private Good

How much of a public good should be produced? Suppose there are only three consumers, Arthur, Bill and Charlie. Figure 1a shows the market demand for a private good produced in a competitive market, where D_A represents Arthur's demand for the good, D_B, Bill's demand and so on. Summing horizontally gives us the market demand for the good, D at the market price, P₀. The efficient output is Q₀ where market demand equals market supply. This outcome is efficient because at Q₀ the marginal benefit each consumer would obtain from an extra unit of the good equals the marginal cost of supplying the good. However, if the good is a pure public good it cannot be provided to one consumer without also being provided to the others; it is non-excludable. The socially optimal (efficient) output for a pure public good is at point Q* in Figure 1b. For a public good, the market demand is found by summing individual demand curves vertically, not horizontally. These individual demand curves are also known as willingness-to-pay curves. So all three consumers consume the total amount of the good (Q*), and the total price, P*, is the sum of all consumers' willingness to pay for the good.

How does market failure occur in the provision of public goods? Figure 1 helps to illustrate the nature of the market failure problem. The market will under-provide public goods since the market mechanism works on the principle that those who cannot pay for a good cannot consume it. In the case of pure public goods, however, once the good or service is provided to one individual it is impossible to prevent others from also consuming it, even if they have not paid for the good or service. In Figure 1, the supply curve shows us the marginal cost of producing one additional unit of the good. In order for quantity Q* (panel b) to be provided, the supplier needs to receive a price of P*. However, at Q*, any individual consumer's willingness-to-pay is below P*. For example, the provision of the public good to Arthur will yield his willingness-to-pay a price of P_A. However, once the good is provided to Arthur, it is also available to Bill and Charlie, neither of whom have an incentive to pay for the good. Public goods therefore suffer from the problem of free-riders. In the presence of free-riding there is an insufficient private market incentive to provide the good. For this reason, public goods are usually provided (or financed by) the public sector. Only if they can be made excludable (thus becoming a toll good, discussed below) will these goods be provided in the private market.

Of course, the polar opposite to a pure public good is a pure private good, characterized by complete excludability and rivalry. There are many, many examples of pure private goods, from a coffee at Starbucks, to the purchase of a piece of food processing equipment, to a section of agricultural land in a country with well-defined and enforced property rights. The owner of a pure private good can exclude others from using/consuming the good, and its use by one individual reduces its availability to others. In between pure public and pure private goods lies a continuum of goods that feature different degrees of excludability and rivalry. Table 1 classifies goods based on their degree of rivalry and excludability, and provides examples in each category.

In between pure private goods and pure public goods there are two broad types of goods with mixed features: common pool goods and toll goods. Common pool goods (also known as collective goods) exist where the cost of excluding free-riders is high: they are rival (like a private good) but non-excludable (like a pure public good). A classic example of a common pool resource is ocean fish in international waters: fish are rival goods since if one person catches and keeps a fish it is no longer available for others. Ocean fish are non-excludable since they are a resource with unlimited access. This can lead to over-fishing and the depletion of the resource. Similarly, the availability of wildlife to hunters on public land is a common pool resource which risks depletion through over-use.

Market failures due to common pool goods are typically addressed through regulating access or assigning property rights to the resource. For example, governments may regulate the hunting of wildlife on public lands through the issue of licenses during specified hunting seasons. Alternatively, governments may deal with over-use of a common pool resource through the allocation of property rights to its use. In the absence of transaction costs, this encourages optimal use of the resource. Gray et al (2007) provide several examples of common pool goods from the agricultural sector, including generic market promotion, and food safety and quality control. They argue that several aspects of commodity marketing are by nature non-excludable: generic promotion of a commodity benefits all producers of that commodity. Given the credence nature of many food safety and quality traits (without labelling consumers cannot easily detect them in a product), any problems with a food product sold by one firm can quickly spill over to other firms within the same commodity group. Similarly, an investment by one firm to convince buyers that a particular Canadian-produced commodity is superior can be captured by any competitor selling the same commodity. There are reputation effects that are non-excludable; they argue that food safety controls and some forms of generic quality assurance have common pool properties and may be undersupplied by the private sector. The response to these common pool problems is to establish regulated standards and processes for food safety, and grading and inspection services for food quality.

The top right-hand quadrant of Table 1 represents goods that are non-rivalrous but excludable. It is feasible for these goods to be provided either publicly or privately, and they are sometimes known as near-public goods or toll goods. Examples include sports events, cable television broadcasts, public lectures, uncongested toll highways and bridges. Use by one individual does not reduce the availability of these goods for others, but it is possible to exclude users. Thus, while these goods may sometimes be provided by the public sector, it is feasible for them to be provided by private firms. Hence in Canada we have the publicly-operated CBC Television broadcaster alongside privately operated broadcasters such as CTV. Some parks are owned and operated by the public sector (Banff National Park in Alberta, Algonquin Provincial Park in Ontario), while private parks also exist (e.g. amusement and theme parks such as Disneyland in California). Similarly, toll highways and bridges can be either public or privately owned. Gray et al (2007) provide several examples of toll goods in the agricultural sector, including patented (protected) knowledge. While intellectual property is non-rival (if I use a piece of knowledge in my production process it does not preclude someone else from also using that knowledge), access to that knowledge can be restricted through the use of patents or plant breeders rights legislation.

The challenge with toll goods, particularly when they are inputs into production processes, is the creation of monopoly rents due to market concentration. Due to the non-rival nature of toll goods they usually only need to be provided once: one bridge at a specific spot over a river; one railway line between Saskatoon and Edmonton. As a result, there are economies of scale in providing the good or service; the lowest average cost occurs if the good or service is provided by a monopoly. As is well known, through the exercise of market power, private monopolies can raise prices and restrict quantities so as to capture additional rents from the marketplace. This is a form of market failure. Governments have responded to the market failure associated with toll goods in a variety of ways, including public provision of the good or service (state-run railways, publicly provided roads and bridges) or through regulation (rate of return regulation for private railways, price regulation for private power and water utilities).

Some types of goods that are non-rivalrous but excludable are known as club goods (Buchanan, 1965). These are goods whose benefits are shared among a specific set of individuals within a defined group to which membership can be limited: a club. Club goods are therefore characterized by excludable benefits. The club members share the costs of producing (providing) the good, thus there are benefits to collective membership. Club goods are subject to rivalry and congestion as use increases; which ultimately determines the optimal size of the club. The classic examples provided by Buchanan (1965) are a community-provided local swimming pool or a private golf club. Members share the use of these facilities; as use increases the facilities become congested and the benefits individual members receive from the facility declines. Enforceable property rights also play a central role as they allow for the exclusion necessary for the club to function. In the absence of effective property rights, non-members can free-ride on the benefits produced by club members. As with toll goods, club goods can be privately or publicly provided, depending on the ability to exclude free-riding by non-members.

A final concept that is useful for our analysis is the concept of network externalities which arise when the benefit a user derives from a good or service increases with the number of other users of the good or service. Direct positive externalities arise as a direct effect of the number of users on the quality or value of the good (Katz and Shapiro, 1985). The classic example is a telephone service. Each additional user of the system increases the value of the entire system to all existing users because it offers access to one more individual (Economides, 1996). Indirect externalities occur when additional users of a product or service create increased demand that results in more products available for sale to all users (Katz and Shapiro, 1985). Computer operating systems are another example: the more people who use a Microsoft Windows PC or Apple, the more incentive there is for software providers to develop software compatible with these systems. An individual purchaser of a Microsoft Windows system benefits indirectly from others purchasing the same type of computer system because the available software options are increased. These are network externalities. In the context of our analysis, we can think of network externalities existing for club goods; members benefit from more members joining the network (club) due to shared costs of provision[Note 6]. Section 4 explores whether network externalities may exist for a national livestock and poultry traceability system.

Finally, a couple of clarifications are useful. First, note that the benefits from pure public goods are societal benefits, and as such can flow both to the 'general public' at large, but also to other private firms. For example, the beneficiaries of national defence are the residents in a country (the 'general public'), however, the beneficiaries of a lighthouse are usually private ship owners; nevertheless, a lighthouse still has features of a public good. Public goods are defined on the basis of provision (i.e. the market will under-provide a public good), rather than who benefits (the 'private sector' versus the 'general public'). To avoid confusion we use the term social or societa benefits (rather than public benefits) to refer to the benefits that flow from public goods.

Second, the argument that the private market may under-provide a good relative to the socially optimal level does not necessarily mean that government should provide the good, or that government provision will result in the optimal level of the good. Clearly there are also costs to government provision of public goods, common pool goods or toll goods. These can include costs of establishing and enforcing property rights, cost of collecting and enforcing user fees, and X-inefficiency losses from organisational slack (the lack of competitive pressure). Government intervention to correct the market failure is justified if, and only if, the benefits of intervention outweigh the costs. Therefore in any policy decision, an assessment of the benefits and costs of that policy is warranted.

To summarize, the key characteristics by which economists define public and private goods, and goods with mixed features, are the degree to which the good is excludable and is non-rivalrous in consumption. These two characteristics are used to analyse various components of the Canadian Livestock and Poultry traceability program in section 4. Implications of these characteristics for the provision and funding of public, private, toll and common pool goods are considered in the next section.

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3. The Provision Of Public, Private And Mixed Goods

By definition, private goods are provided through markets; property rights are clearly defined and enforceable, and excludability is possible so that private market transactions between buyers and sellers govern the exchange of private goods. Pure public goods, which the market will provide only at sub-optimal levels, are usually provided by the government, given the lack of enforceable property rights and the non-rivalrous, non-excludable nature of these goods or services. For example, national defence is publicly provided and financed through government expenditures funded from tax revenues. Determining the optimal level of public good provision is challenging; unlike with private goods the government does not have the benefit of market signals to determine the optimal level at which to provide a public good or service. Instead, broad indicators of society's preferences are used to gauge the social benefits from public goods, for example, the electoral system. Political parties pledge different degrees of public good provision (e.g. spending on national defence; spending on environmental protection; provision of street lighting in a neighbourhood), and voters decide which platform best meets their preferences. Clearly, this is a fairly blunt instrument for assessing the social benefits (demand) for a public good or service. Elections are fought on a multitude of issues, and due to the short-run nature of the electoral process long-term investments in public goods may remain under-funded (Gray et al., 2007). Government provision of public goods is also subject to budgetary constraints and the availability of taxation revenue to support public expenditures.

If it is possible to establish an enforceable set of property rights for a public good through technological change, or a change in the legal institutional framework, public goods can be made excludable and transformed into toll goods provided by the private sector. For example, the development of patentable genetic traits in crop breeding and changes to plant breeders rights legislation to allow the enforcement of intellectual property rights facilitated a move from primarily publicly funded R&D in plant breeding to the emergence of significant private sector investments in crops with new traits. Similarly, if exclusion is made feasible for a specific group which receives the benefits of a good, it becomes a club good. Members of the group finance the provision of the good or service through membership fees or levies. For example, changes to agricultural marketing legislation to allow producer groups to collect check-off revenues for funding collective industry initiatives (generic promotion activities, R&D investments) remove the free-rider problem.

What about the provision of toll goods; i.e. those that are non-rivalrous but excludable? As indicated in section 2, toll goods by their nature lend themselves to the creation of monopoly power (one bridge at a specific spot over the river; one railway line between Saskatoon and Edmonton). We have also seen that toll goods can be either publicly or privately provided. In general, this occurs in four main ways, each with different implications for who bears the cost of the good or service.

Figure 2: The provision of Toll Goods

First, governments can provide the public good or service and charge a user fee equal to the marginal costs of providing that good or service. Due to the nature of the economies of scale in the provision of this good (average costs fall over every additional unit of output), the good or service will be provided at a loss. Taxpayers subsidize the difference. An example is a public transit system in a city. Figure 2 shows this outcome, with Q_U of the good provided and users charged a user fee of P_U. This generates the 'socially optimal' price and quantity since the marginal benefits that consumers receive from the good (represented by the demand curve) are equal to the marginal costs of supplying the good. However, this outcome results in the good or service being provided at a loss (price is less than average cost). The loss is subsidized from tax revenues. The light shaded area in the lower part of the figure represents the subsidy burden borne by taxpayers. Decision variables for whether this option is chosen include the feasibility of colleting and enforcing user fees (requiring the purchase of a bus ticket; limiting access to subway platforms to users with valid tickets), as well as the availability of tax revenues to subsidize provision of the service, together with the social acceptability of taxpayer subsidization (a normative value judgement).

A second option for the provision of toll goods is government provision of the good or service as a not-for-profit state monopoly, where users (consumers) are charged a price equal to the average cost of production so that provision of the good or service is at a break-even level. As can be seen from Figure 2, this results in a higher price charged to consumers (P_R), but eliminates the need for taxpayer subsidization of the good or service (i.e. the losses represented by the lightly shaded box are avoided). State-owned power utilities are an example. The quantity of the good (Q_R), however, is sub-optimal from society's point of view.

A third option is for the government to allow a private firm to provide the good or service in a regulated environment to limit the exercise of monopoly power. Usually the government either regulates the price that the firm can charge, or the rate of return that the firm can make so that the firm is just covering its average costs (just breaking even). Again, this results in outcome P_R, Q_R in Figure 2. The need for taxpayers to subsidize the provision of the good or service is removed, but there are losses to users from paying a higher price. The quantity of the good is again sub-optimal from society's point of view. Regulated electrical utilities or regulated railways are examples. One challenge with this method of provision lies in establishing the regulated price or regulated rate of return (i.e. determining true average costs) as the provider has a strong incentive to inflate the true average costs of production so as to receive a higher price. They also have no incentive to keep costs down as their average costs will be covered whether or not they are efficient. The regulated monopoly provider also has less of an incentive to invest in long-term renewal of infrastructure or improvements in the quality of service if future returns on these investments are expected to be limited. For comparison purposes, Figure 2 also shows the outcome predicted to occur if an unregulated private monopoly provides the toll good. Quantity is restricted to Q_M so that price rises to P_M yielding monopoly profits equivalent to the upper striped box.

The fourth option sometimes used in the provision of toll goods is a regulatory attempt to create a competitive industry structure through the break-up of vertical monopolies, usually as a precursor to privatization. For example, in the UK, British Rail - the nationalized, publicly run railway service, was broken up into a series of smaller regional private railway service companies, with the rail track system operated separately by Rail Track. The intent was to create competition in rail service provision (more than one rail company could run trains down the tracks), while allowing economies of scale in the provision of one set of railtracks. Deregulation in the electrical utility sector is another example, where the electricity generating capacity may be privatized separately from the power distribution networks. In these cases, governments attempt to use competition regulations to limit the exercise of monopoly power through influencing the structure of the industry.

In the case of club goods, which share many of the same features as toll goods, provision is funded through limits on membership to the club (to prevent free-riding) and shared costs among members. Clubs may be an efficient means by which to collect user fees, although there may be transaction costs in achieving consensus among club members regarding the appropriate level of those fees and, therefore, level of service provision.

Let us turn briefly to the provision of common pool goods. As indicated earlier, the non-excludable nature of these goods or resources means that they are subject to over-use or depletion. There are three main ways in which society addresses the production and use of common pool goods (Gray et al., 2007). First, governments may assign property rights to the resource in an attempt to create incentives for the optimal use of the resource, for example fishing licenses or quotas, or tradable emission permits. Second, governments may regulate access to the resource, for example through enforcing hunting or fishing limits, or establishing non-profit regulatory authorities to govern access (e.g. regional water authorities). Finally, governments may subsidize the production (protection) of the common pool good (resource), financing the common pool good through taxation revenues. These solutions are not costless, and come with a need to monitor and enforce property rights, access or use.

To summarize, this section has shown that the provision of goods that lie along the continuum from pure private to pure public goods is not straightforward. In the case of toll goods, there are distributional questions around whether taxpayers or users bear the primary cost burden, and trade-offs between incentives for long-term innovation and investment, and rent capture from monopoly power. In the case of common pool goods, the ability to establish effective property rights is frequently a challenge.

The appendix presents seven case studies that illustrate examples of the provision and funding of services or programs that deliver a mixture of public and private goods. Case study 1 discusses the provision of quality control programs to the agri-food industry (grading and food safety inspection); case study 2 discusses agricultural research; case study 3 discusses irrigation in Alberta; case study 4 discusses environmental stewardship; case study 5 discusses the implementation of a nationwide system of electronic medical records; case study 6 discusses the Verified Beef Program, while case study 7 discusses the example of Parks Canada.

Drawing upon the discussion of public and private goods in sections 2 and 3, the analysis of the Canadian livestock and poultry traceability system in section 4 uses the concepts of excludability and rivalry to classify the public/private good nature of the traceability system, and implications for the provision and funding of traceability:

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4. Public, Private, Toll And Club Goods In The Canadian Livestock And Poultry Traceability System

The public/private good nature of a Canadian Livestock and Poultry Traceability system can be examined from two different perspectives: i) the traceability information itself, including the infrastructure that delivers that information; and ii) the core components of the NAFTS vision (emergency management; market access and industry competitiveness; consumer confidence).

4.1 Traceability Information as an Output: The Traceability Infrastructure

Traceability information per se is a toll good. It is non-rivalrous: the use of a specific piece of information from a traceability database (e.g. animal identification and/or movement information) does not preclude its use by someone else (access to that information is a different issue relating to excludability and is discussed below). As with most types of information or knowledge, the same piece of information can be used multiple times by multiple users of the information. This is similar to the non-rivalrous nature of intellectual property discussed in section 2 (i.e. if I use a piece of knowledge in my production process it does not reduce the availability of that knowledge to someone else). Excludability, however, is a different matter. As with the example of protected intellectual property, traceability information is excludable. Access to the traceability information can be restricted to authorized users for a specific purpose. Indeed, determining the rules around access to traceability data and authority-to-share is a core aspect of establishing a functioning national traceability system. The governance structure for establishing the degree of excludability: who has access to traceability data and for what purpose; who is responsible for privacy and data stewardship; how informed consent for use of traceability information is obtained, are all critical considerations in the establishment of a national agri-food traceability system.

As we saw in section 2, goods that are non-rivalrous and excludable in nature are classified as toll goods. Examples include uncongested roads, bridges, railtracks, protected intellectual property, parks, cable TV broadcasts, etc. The railtrack is a particularly useful analogy: different rail cars can run along the track at different times, but access to the service is excludable. Similarly, different users can make use of traceability information, depending on the rules of authorized access, but access to that information is excludable. Toll goods can be either publicly or privately provided (e.g. open access publicly provided bridges versus privately owned toll bridges). As section 3 showed, the challenge with private ownership and operation of toll goods is the creation of monopoly power. In the context of one national livestock and poultry traceability system, the provision of that traceability infrastructure through a purely private sector third party information provider (one national traceability firm) would obviously vest significant monopoly power in the hands of that firm; just as the existence of one railway company has a pure monopoly over rail services between two towns, or a privately owned bridge at a specific location across an river that cannot be forded or crossed by a ferry has a pure monopoly over transportation across the river at that location.

The evident market failures in these cases indicate a role for public sector intervention. From section 3 we also saw that public sector involvement in the provision of toll goods can range from the regulation of private provision, through to public provision funded solely through user fees (tolls) or through a combination of user fees and taxpayer subsidization[Note 7]. This begs a number of questions: who are the users of the traceability system and is it possible to collect user fees; is taxpayer subsidization necessary to induce provision of the traceability service; what role might regulation play in the provision of traceability, i.e. are there jurisdictional barriers to efficient regulation?

In the context of private, public and toll goods, the users of the good are those for whom the good or service delivers a benefit: the purchasers of a private good such as a cup of coffee; safer citizens in the case of a public good like national defence; rail travellers or grain shippers in the case of a toll good such as a railway. The total ,benefit that is received from a private, public or toll good is captured by the market demand curve for that good. In order to shed some light on the question of "who pays", or what should be the distribution of the cost burden across users and taxpayers, it is necessary to consider the key benefits of a traceability system. We therefore define users broadly in terms of those groups who will benefit from traceability information.

Detailed analyses of the potential benefits of traceability systems have been presented elsewhere (e.g. Hobbs et al., 2007; USDA, 2009). These analyses, together with the draft NAFTS vision statement, provide a means by which to differentiate the public/private good nature of a traceability system, and identify the 'users' or beneficiaries of the system.

4.2 Traceability Benefits as an Output

The draft vision for a National Agriculture and Food Traceability system is to: "#8230; better serve citizens, industry and government. The system will provide timely, accurate and relevant information to enhance emergency management, market access, industry competitiveness, and consumer confidence." (Trace R&D 2009)

There are two key components to this vision statement for the purposes of the present analysis, i) the scope (industry - collectively or as individual producers; citizens; and government); and ii) three types of benefits or outputs (emergency management, market access and competitiveness; consumer confidence). Table 2 categorizes the benefits from the national traceability system into public, private, and mixed goods using the classification criteria outlined in section 2. Explanations of these categorizations are provided in the following sub-sections.

4.2.1 Emergency Management and Food Safety

A primary purpose of the national livestock and poultry traceability system will be to prepare for and respond to emergencies, including issues related to animal health, plant health, and food safety, as well as natural disasters (floods, ice storms, etc.), man-made disasters (nuclear accidents, chemical spillages, the accidental release of airborne contaminants, etc.), and other events that may require the implementation of emergency management strategies related to the agricultural and food supply system[Note 8]. Are these public, private, toll or common pool goods? Consider the two classification criteria, rivalry and excludability: improved responses to animal disease outbreaks and food safety emergencies are non-rivalrous. If one individual benefits from these improvements it does not preclude others from sharing in these benefits. The degree of excludability is less clear cut. At the level of the entire food supply system, if a NAFTS leads to a generally safer food supply for society as a whole[Note 9], those benefits are non-excludable. Much as every citizen benefits equally from the provision of national defence, every citizen benefits equally from a safer food supply. In this sense, a safer food supply system is a pure public good.

As we saw in section 2, market failure can also occur in the presence of imperfect information, for example, in the case of credence attributes which are not observable to buyers. Traceability information is a credence attribute. While some types of traceability information can certainly be provided through the private market if consumers are willing to pay for this information[Note 10], traceability as an emergency management tool has far broader societal objectives.

The ability to respond to livestock (poultry) disease outbreaks more effectively reduces the economic impact of disease outbreaks on the livestock (poultry) sector: more targeted quarantine, eradication or vaccination programs meaning fewer affected herds/flocks (and/or shortened quarantine/vaccine periods). This benefit is somewhat excludable in the sense that, for non-zoonotic diseases (i.e. those that cannot be transmitted to humans), the benefit accrues primarily to the livestock and poultry sector, rather than to society in general. The owner of a flower shop in Vancouver does not benefit directly from the reduced costs of responding to (non-zoonotic) animal disease outbreaks[Note 11], but the owner of a cattle feedlot in Alberta that avoids being placed under quarantine due to an effective livestock traceability system does benefit. For many (non-zoonotic) livestock and poultry diseases, the livestock disease emergency management benefit therefore has aspects of a club good. The livestock industry collectively benefits. In contrast, a zoonotic disease is a disease in animals that can be transmitted to humans; examples include rabies, anthrax, BSE, avian (H5N1) influenza and the H1N1 influenza virus, among others. For these diseases the benefits of emergency management extend beyond the club (the livestock sector) to the human population and, given the non-excludable nature of these benefits, they have public good aspects. Thus, emergency management delivers outcomes that are a combination of club good and public goods. Different elements of a traceability system might make a relatively larger contribution to the emergency management benefit. For example, animal movement information would likely play a critical role in responding to an outbreak of foot-and-mouth disease. Depending on the disease, whether it also has food safety or human health implications, the benefits of animal movement information may therefore accrue both within the industry (to the club) and more broadly to society.

As we saw in section 3, club goods can be funded through the collection of member levies (user fees), provided that mechanisms are in place to prevent free-riders from receiving the benefits without incurring any of the costs. In the case of public goods, by definition, left to its own devices the market will under-provide a public good. Thus we may reasonably assume that without some form of incentive (carrot) or coercion (stick), the provision of effective emergency management systems will be sub-optimal. Benefit-cost analyses that capture the distribution of benefits and costs across different stages of the livestock and poultry sectors would be needed to identify where the key costs arise and (more challenging) how the benefits are distributed (see for example USDA, 2009).

One important caveat is warranted. We have argued that a 'safer food supply system', including control of zoonotic diseases, is a public good, while improvements to (non-zoonotic) livestock disease emergency management could be considered a club good. By design, the focus of this project is limited to the livestock and poultry components (birth to slaughter) of a broader national agriculture and food traceability system. Arguably, the full scope of the public good benefits from a 'safer food supply system' is more apparent in a national, comprehensive 'farm-to-fork' agriculture and food traceability system than in a birth-to-slaughter traceability system for a subset of the agricultural sector (livestock and poultry). Nevertheless, if livestock and poultry are the necessary precursor to a more comprehensive traceability initiative, there is a risk in under-valuing the potential public benefit contribution that the livestock and poultry component may eventually make to the bigger pictur of a national agriculture and food traceability system.

4.2.2. Market Access and Competitiveness

A second group of objectives or benefits of a traceability system, as outlined in the NAFTS vision statement, is to enhance or maintain access to international markets and enhance industry competitiveness. The recent comprehensive USDA report on costs and benefits of an animal traceability system (USDA, 2009) identifies a similar group of benefits (which the USDA report defines as "benefits to trade and markets"), while Hobbs et al. (2007) also identify market access and market enhancement as potential benefits of a livestock traceability system. Again, we use the two criteria of rivalry and excludability to place these benefits on the public-private goods continuum. Improving or protecting market access for Canadian poultry and livestock products is non-rivalrous: if market access for (e.g.) beef products is protected (or more quickly regained) as a result of having a traceability system in place, those benefits are shared across the sector. The benefits to one beef producer, feedlot or packer do not preclude others in the sector from experiencing the same benefit[Note 12]. As with emergency management, however, those benefits are confined to the livestock and poultry sectors participating in the traceability system. As such, the benefits are (somewhat) excludable. Those outside the sector do not benefit. Exclusion may even be possible within the sector, e.g. for non-compliance with traceability tagging requirements, or non-compliance with additional market-specific requirements such as age verification. As Table 2 indicates, we can therefore make the case that this component of traceability has the features of a club good, where the club is defined broadly to include the livestock species groups and downstream participants in those supply chains.

Traceability systems may include age verification information[Note 13] as a means of facilitating access to export markets where this information is a requirement of that market. For example, Japan requires beef imports to be from cattle verified to be less than 20 months of age. Whether present as a voluntary or mandatory component of a traceability system, age verification contributes primarily to the club good market access outcome. It has less relevance to the pure public good outcomes of a 'safer food supply system' or 'consumer confidence'. Thus, the various elements of a traceability system may make different contributions to the public, private and club good components of traceability summarized in Table 2. Other elements of traceability are central to the operation of the system and underpin all of the outcomes identified in Table 2. For example, animal (lot) identifiers are the basis of most traceability systems and underpin all of the components of a traceability system outlined in Table 2.

The concept of network externalities is also useful in considering the extent of collective market access and competitiveness benefits from a national traceability system. The more comprehensive the traceability system in terms of regional and sectoral coverage, the greater the likelihood that government-to-government negotiations will be able to protect market access for Canadian livestock producers in the event of a problem. If one sector of the industry were to opt out, the system is no longer national in its coverage, and gives importing country governments an excuse to keep borders closed (perhaps in response to domestic protectionist pressures). Those participating in a livestock and poultry traceability system therefore benefit as more join the system.

The potential effects of a traceability system on industry competitiveness have a number of dimensions. The recent USDA (2009) study lists enhancement of global competitiveness (the idea that animal identification systems may become prerequisites to international trade), increased transparency in the supply chain, and improvements in value-added and certified program efficiency as some of the effects of a national traceability system on competitiveness. The earlier study by Hobbs et al. (2007) referred to potential supply chain efficiencies, production management efficiencies, and value-added or market enhancing effects. These potential impacts on industry competitiveness may be forthcoming to a greater or lesser degree, depending on the extent to which industry stakeholders are able to leverage the existence of a traceability infrastructure into broader commercial benefits. As can be seen from Table 2, the 'industry competitiveness' benefits are private goods in most instances, but may also have aspects of a club good where they relate to benefits that flow to the sector collectively, rather than to specific firms.

To the extent that a traceability system could assist participants in the livestock and poultry sector in achieving supply chain efficiencies, add value to their products through product differentiation, or improve individual firm competitiveness, these are private benefits. They are excludable and rivalrous; they accrue solely to the individuals (firms) who participate in value-adding activities or supply chain enhancements backed by traceability. If these benefits were present to a significant degree, we would expect private sector traceability systems to emerge to deliver these outcomes. Indeed, there is a thriving industry in traceability and information systems aimed purely at delivering private benefits through traceability technologies that identify or verify the presence of credence attributes, or that link supply chain participants together to enhance information flows (the exhibitors at the Trace R&D conference in Winnipeg in June 2009 being a case in point). As indicated earlier, while private provision works well for purely private goods, the broader industry or societal benefits (emergency management, food safety, etc.) are public/near-public goods which will be under-provided by the market place.

Effects of traceability on industry competitiveness and industry reputation have elements of club goods, since they are non-rivalrous within the industry but accrue only to industry members (within the clu). To the extent that this benefit is present (or seen to be present), it creates an incentive for the industry collectively to support development and implementation of a comprehensive national traceability system. The means by which industry reputation and competitiveness is managed within the club is a separate issue. Clearly, there are spillover effects (externalities) within the sector from actions by individual industry members that enhance (or detract from) the reputation of the sector as a whole.

Finally, it is worth noting that the club good benefits identified in Table 2 accrue to the livestock/poultry sector collectively. The extent to which the economic benefits from increased market access or industry competitiveness accrue to different levels of the supply chain within the livestock sector will depend on the structure of the industry, the degree of market power and the ability for rent capture by downstream firms. In other words, will the benefits of a national traceability system be passed back along the supply chain to producers in the form of price premiums (or the avoidance of price discounts), or will market power at one (or more) levels of the supply chain capture most of the gain. This will likely differ across sectors depending on the structure of the sector and the competitive pressure facing downstream firms.

4.2.3 Consumer Confidence

Finally, consumer confidence is close to a pure public good. It is non-rivalrous in the sense that a traceability system which enhances consumer confidence in the Canadian food supply system does not reduce consumer confidence in, say, the Canadian automobile industry. It is non-excludable in the sense that a general enhancement in consumer confidence has widespread benefits that are not limited to specific firms or subsets of the agriculture and food sector (although clearly includes private firms).

Table 2 summarizes the classification of various components of the Canadian Livestock and Poultry Traceability system.

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4.3 Implications for the Governance and Funding of a National Traceability System

As Table 2 indicates, a national livestock and poultry traceability system will produce outcomes that fall into four general categories, with different implications for "who pays".

Little needs to be said about private goods; in these cases there is no market failure, with a clear market incentive for firms to provide these goods or services. A portion of the benefits are undoubtedly public goods, suggesting a need for public sector support to establish and implement a national livestock traceability system as a component of a wider agriculture and food traceability system. To the extent that government policy recognizes traceability as a component of an enhanced food safety system in Canada and as a tool to maintain consumer confidence in the Canadian food supply system, there is a compelling rationale for subsidizing, at least in part, the implementation of the livestock and poultry traceability program. This may be particularly important at stages in the supply chain where the private good aspects of a traceability system may have less resonance (are more distant), and yet without which traceability is incomplete. An example is the recently announced 'Livestock Auction Traceability Initiative' which will provide $20 million in funding to upgrade handling systems at facilities in which animals routinely commingle (auction marts, assembly yards, fair and exhibitions, community pastures, etc) (AAFC, 2009).

Section 4.1 showed that the traceability system itself, the infrastructure, is a form of a toll good. We saw in sections 2 and 3 that the challenge with toll goods is the extraction of monopoly rents through market power. Options for provision and governance of toll goods range from competition regulations to limit the scope of monopoly power and regulated private monopolies, through to public provision of the good or service with a trade-off between funding solely through user fees and a combination of user fees and taxpayer subsidization. The first two options have little applicability to the case of a national traceability infrastructure (it is hard to envision one firm being the monopoly traceability service provider for the entire livestock and poultry sector being acceptable to industry stakeholders). Thus we are left with public provision through user fees or a combination of user fees and taxpayer subsidization. In this case, user fees equate to cost-sharing among those required to participate in a mandatory traceability system. Our earlier analysis suggested that the decision as to whether the burden falls primarily on users or on taxpayers is largely a normative one (i.e. a value judgement), although it might be influenced by the feasibility of collecting (enforcing) user fees and the availability of tax revenues. The decision may also depend on the extent to which the benefits from the traceability system flow primarily to the livestock and poultry sector or more broadly to society at large.

Another way to think about this decision is the analogy of an uncongested road. Should an uncongested road, whose traffic is 95% trucks be funded differently from an uncongested road whose traffic is 95% families in their car? In both cases the road is a toll good, but clearly there is a far more compelling case for public funding of the road in the latter case, while we might expect to see a greater proportion of funding via user fees (tolls) in the first case. In the case of a traceability system, the Canadian Food Inspection Agency (CFIA) may access the traceability information to initiate emergency management procedures in response to a food safety problem or a livestock disease outbreak. As we saw earlier, the benefits from these actions flow both to society at large and to the livestock sector itself.

A number of the outputs of a traceability system were classified as having the features of club goods. Club goods are typically funded collectively among the club members who receive the excludable benefit. Examples from the agricultural sector include levies and check-offs to fund collective marketing or R&D strategies. The challenge presented by club goods, however, lies in the transaction costs of organizing the club (obtaining consensus on decisions affecting the club), and preventing free-riders. This might not be too difficult with a private golf club whose membership consists of a relatively small number of players, but it gets trickier if we consider, for example, all cow-calf producers in Canada as the club which must reach consensus on the provision and funding of a traceability system. It gets even trickier if we expand the notion of the club to include all beef industry stakeholders (cow-calf producers, feedlots, packers, distributors, etc) in Canada; it becomes even more challenging if we consider the boundaries of the 'club' to be all livestock and poultry sector stakeholders, and an intractable problem when we consider the entire agriculture and food system. Despite the fact that excludable benefits may exist for the livestock and poultry sector as a 'club' (as per Table 2), the transaction costs of achieving consensus and preventing free-riders would be prohibitive. This suggests a role for government in mandating traceability[Note 14], then finding ways to encourage compliance rather than incuring significant enforcement costs or risk system failure through pervasive non-compliance.

It is clear that a national livestock and poultry traceability system delivers a blend of private good, public good and near-public good (toll good, club good) benefits. The key issue therefore is likely the relative size of the club good and private good benefits relative to the pure public benefits since this affects the incentives for the industry to support the provision of a traceability system collectively versus the need for public funding to facilitate the provision of a national traceability system. Determining the relative size of these benefits lies beyond the scope of the present analysis and would require a comprehensive benefit-cost analysis.

Nevertheless, previous studies offer some insights into the potential magnitude of the relative benefits and costs of a national traceability system. In a qualitative assessment of the potential benefits of a national livestock traceability system, the analysis by Hobbs et al (2007) anticipates that "livestock disease management" (emergency management), trade (market access) and "food safety and public health" are likely to be the largest benefits from traceability. As Table 2 indicates, the latter is a pure public good, while the others are "near-public goods", i.e. club goods. The analysis suggested that the pure private good benefits outlined in Table 2 (product differentiation, supply chain efficiencies, etc) are 'enabling' benefits that may flow from a national traceability system but that are likely to be smaller in magnitude than the risk management benefits. In terms of the 'emergency management' and 'market access' club goods, an earlier analysis of the economic impacts of a potential outbreak of Foot-and-Mouth Disease (FMD) in Canada (Serecon, 2002) provides some guidance. The study suggested that the costs of a disease outbreak could range from $13.7 billion to $45.9 billion, depending on the size of the outbreak, with the greatest single impact being the opportunity cost of lost trade given the immediate closure of all export markets for Canada's livestock that would result from a FMD outbreak. Further, the analysis indicates that an effective disease control strategy, including zoning, could mitigate the impacts by up to $21.1 billion (Serecon, 2002). To the extent that a national livestock traceability system would facilitate effective zoning, and if there is an agreement on the implementation of zoning at the World Organisation for Animal Health and the WTO[Note 15], this provides some indication of the potential magnitude of the 'emergency management' outcome from a traceability system.

A 2007 analysis of the potential costs of traceability in Canada found that the distribution and size of costs will vary considerably, depending on herd and operation size, across species, and depending on the complexity of the animal identification system and the need for facilities modification and investment in new equipment (Gardner Pinfold, 2007). The study estimated that the largest share of both the fixed start-up and the annual variable operating costs per head would likely be borne by livestock producers (Gardner Pinfold, 2007).

A comprehensive benefit-cost analysis of the US National Animal Identification System (NAIS) estimates that the economic benefits in both the US and the international marketplace resulting from enhanced traceability likely outweigh the cost savings realized during animal disease control and eradication efforts (USDA 2009). In the absence of full and effective implementation of NAIS, the USDA analysis predicts significant losses to the US livestock industry from reduced export market access. The US analysis also found that a significant proportion of the costs of adopting NAIS would occur at the producer level in the form of tags and tagging costs. Costs varied across sectors depending on the requirement for individual versus lot/group of animals/poultry. The US study provides a useful guideline, although clearly caution should be exercised in extrapolating estimates of costs and benefits from a US context to a Canadian context given differences in industry structure (e.g. supply managed sectors in Canada), and differences in the relative importance of export markets (and therefore potential magnitude of losses from export market closure). A comprehensive benefit-cost analysis in a Canadian context would be necessary to determine the size and distribution of the economic impacts of a national traceability system in Canada.

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5. Implications And Conclusions

In conclusion, private goods are distinguishable from pure public goods by the features of excludability and rivalry. The non-rivalrous and non-excludable nature of pure public goods means that they will be under-provided by the market. In reality there are few examples of pure public goods but there are many examples of so-called near-public goods that are either non-excludable or non-rivalrous. The analysis of the proposed mandatory Canadian Livestock and Poultry Traceability program is based on these two key classification criteria. The key insights from the analysis are summarized below, followed by 'lessons from experience' drawn from the case studies and project interviews. The section concludes with suggestions for the future.

5.1 Key Insights from the Analysis

• The challenging aspect of the traceability program is its potential to deliver a blend of public, private and near-public goods.
• At a broad macro level, there are pure public good aspects in the form of potential enhancements to food safety response (emergency management) systems and to consumer confidence.
• At the other end of the spectrum, any product differentiation, supply chain efficiency or individual supply chain competitiveness benefits that may be facilitated by a national traceability system would have pure private good aspects.
• In between lie two types of near-public goods. Potential benefits that flow primarily to the sectors participating in the livestock traceability system are club goods, for example, enhanced emergency management for livestock diseases, market access, industry reputation and competitiveness. These benefits are non-rivalrous and excludable only to the extent that they accrue to specific sectors. The challenges in provisioning club goods include the transaction costs of arriving at and enforcing collective decisions, and preventing free-riding. The distribution of benefits within the club depends on relative degrees of bargaining power between the parties. Perceptions that one sector of the industry benefits at the expense of others will lead to a break-down in the 'club' and weaken incentives for full compliance with a national traceability system.
• Finally, the traceability infrastructure itself has features of a toll good: it is non-rivalrous but excludable, with implications for how that information should be provided and its access governed. Specifically, toll goods are subject to monopoly power. There is a role for the public sector in provisioning the traceability infrastructure and establishing an appropriate governance mechanism for access to/use of the data.
• The blend of public, near-public and private good features of a national livestock and poultry traceability program indicate that a combination of industry and public funding is appropriate for achieving effective traceability.
• Given the public good aspects of a comprehensive traceability system, left to its own devices the market will under-provide traceability. Yet, the club good aspects of traceability also indicate that there may be important benefits at stake for the industry in establishing a credible traceability system, and therefore an incentive for the industry collective to share some of the costs.

5.2 Lessons from Experience

Interviews with industry stakeholders, academics, and individuals with previous policy-making experience provided a number of examples of the provision of public and near-public goods, as summarized in the cases presented in the appendix. The interviews also provided some practical lessons from implementing policies that deliver a blend of public, near-public and private good benefits.

• There is no magic formula for determining who pays what share of public-private goods. Economic analysis, including a quantitative benefit-cost analysis, can help inform policy decisions. Often, however, the final outcome is dependent upon the political process of negotiation among federal government, provincial and territorial governments, and industry stakeholders.
• Clear communication and demonstrable benefits will be necessary to get sufficient buy-in from all sectors of industry. This is particularly important in establishing an effective national traceability system, since the system as a whole is only as strong as its weakest link. Governments, as well as producer groups, have a key role to play in this regard.
• Past failures due to technological glitches tend to increase resistance and reduce compliance. Opportunity costs (time and effort to learn a new way of doing things) can be as much a deterrent to adoption as direct costs of compliance.
• As with many programs of this type, obtaining buy-in from smaller producers will likely be a challenge due to economies of scale in adoption, with lower-per-head adoption costs for larger operations due to the fixed costs of adoption.
• Uncertainty over the stability of government support for a program (will it be cancelled due to budget cuts or a change in government) can deter adoption and compliance.
• There has been a general trend away from pure public funding of services that were previously consider public or near-public goods, and toward a blend of user fees and public funding.

5.3 Suggestion for the Future

• A national traceability system is a 'necessary but not sufficient' condition for achieving some of the 'club good' benefits identified in this report, particularly, market access. Efforts will also be necessary at the Federal government level to ensure that trading partners recognize the role that the Canadian traceability system plays in facilitating emergency management procedures, including the ability to declare disease-free zones. Continued efforts will be necessary to push for strengthening of the WTO SPS (Sanitary-Phytosanitary) rules for re-opening export markets following a food safety, animal or plant health incident, based on scientific risk assessments.
• The primary outcomes of a national poultry and livestock 'birth-to-slaughter' traceability system (i.e. a subset of a full national agri-food 'farm-to-fork' system) will be the near-public good benefits of livestock disease management and market access. These are club goods that accrue to the livestock sector (with the caveat that enhanced emergency management for zoonotic diseases also has wider social benefits). As such, it is logical to suggest that 'the industry' should absorb some of the costs. The problem with 'clubs' lies in achieving consensus within the club. In reality of course, 'the industry' is a diverse mix of livestock and poultry sectors, and a diverse mix of supply chain participants (from breeders to producers to auction barns to livestock haulers to feedlots to packers and processors, etc). The transaction costs of achieving consensus on the level of industry investment needed and of obtaining compliance with traceability protocols may be prohibitive. This in itself would be a form of market failure necessitating some form of public sector intervention to facilitate adoption (e.g. grants to fund technology and facility upgrades, training, etc.).
• The broader societal benefits flowing from the pure public goods (enhanced food safety and consumer confidence) depend entirely on a functioning, effective and credible national farm-to-fork full agri-food traceability system. Failure of one sector or region to participate in the system weakens the entire system. Put together, this suggests that the fixed costs of establishing the traceability infrastructure will need to be borne primarily by the public sector.
• The pathway from a national livestock and poultry traceability system to a full agri-food traceability system needs to be clarified. The notion that "the consumer benefits" (through increased consumer confidence or a safer food supply system) has more relevance in the context of a complete traceability system than the initial 'partial' birth to slaughter system recently mandated. However, clearly the latter is essential to the former. If the costs of establishing a national livestock and poultry traceability system are borne entirely by the club - the livestock and poultry sector - the subsequent societal benefits that may eventually flow from a full agri-food traceability system will not be considered. Again, this suggests the need for public sector funding towards the cost of establishing a livestock and poultry traceability system as the foundation on which a more comprehensive agri-food traceability system would eventually be built.
• Quantifying the size and distribution of the benefits and costs from a national livestock and poultry traceability system would be a major undertaking and was well beyond the scope of this project; nevertheless, analysis of this nature is an important consideration in informing future policy decisions on this issue.

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Appendix - Case Studies

Case Study #1 - Agri-food Quality Control Programs

Agriculture and Agri-food Canada, as well as the Canadian Food Inspection Agency, provides quality control programs to the agri-food industry. These include grading and quality programs (i.e. product standards, grading and labelling of agri-food products) as well as health and sanitary programs (such as the inspection and monitoring of agri-food products and related establishments). Grading and quality programs provide information and assurances to downstream users or end consumers of agri-food products while health and sanitary programs ensure the safety, providing downstream users and end consumers with the assurance of food safety.

The Canadian government and industry share in the costs of these programs via fee-based cost recovery. There are two fee structures in use. Grading and quality programs charge 60% cost recovery to industry while health and sanitary programs charge 20% cost recovery to industry. The rationale for the fee differential between the two types of programs is based upon the perceived level of social benefit relative to private benefit. A lower fee is charged for health and sanitary programs because Canadian consumers benefit substantially from the improved health and safety of food, and the degree of this social benefit is perceived to be significantly higher than the private benefits gained by the agri-food industry or individual agri-food firms from improved health and safety.

On the other hand, grading and quality programs, while providing a social benefit to Canadians by providing product information and quality assurances, confer a greater proportion of private benefit to the agri-food industry and firms because such programs enhance the marketing efforts for their individual products.

Therefore the agri-food industry bears a larger proportion of costs in these programs. While both types of programs have public good aspects, health and sanitary programs are more dominantly public goods - private firms would under-invest in providing them. The fee levels have been established in accordance with similar levels and percentage shares in other programs, relative to high social and low social benefit.

Case 1 Sources:

Canadian Food Inspection Agency, Information Holdings, Institution Specific Classes of Records

Project Interviews

Case Study #2 - Agricultural Research

Traditionally, the publicly funded sector, governments as well as universities and research institutions have pursued basic research for the sake of gaining knowledge, generally to provide a social benefit, including as a benefit to the overall agri-food industry. Such research was funded by the government and educational institutions. The benefits of agricultural research are distributed heavily towards society as individually, no one stakeholder in particular benefits from such research yet all stakeholders will benefit if someone else pays for it. As a result, it is a public good because collectively industry stakeholders would under-invest in research.

Examples of such research include wheat breeding where studies have shown a minimum 10-fold return on cereal development research, a four-to-one return on investment in wheat breeding and twelve-to-one return for barley breeding. Studies have found the overall distribution of such benefits can be as high as 85% as a social benefit and 15% as a private benefit. In beef breeding, the distribution of benefits has been found to be distributed more evenly, with an estimated 40% of the benefit accruing to the private sector, and 60% to society.

Changes to funding and the subsequent control of agricultural research have affected the type and nature of research undertaken. The transition toward greater industry funding of research is highly competitive and has in turn forced academia to directly pursue industry for funding, resulting in a change in research focus from basic research (with social benefits) towards downstream research presenting future commercialization potential, something industry is more willing to pay for. Such research is however, owned by the private sector entity (i.e. the industry member or association) that paid for it. The end result is that socially beneficial basic research is increasingly ignored.

This increasing focus on industry-directed research has implications in terms of intellectual property rights and public goods. Firstly, as industry is funding the research, it will subsequently own the results of the endeavour. However, much of the benefits of agricultural research are social. The race to map the human genome between private pharmaceutical firms and academia is an example. If components of the human genome became privately owned due to privately funded research, public access to that information may be severely restricted, and therefore, the benefits of such knowledge will not be forthcoming at a socially optimal level.

Another is the implications of private ownership of genetically modified organisms (GMOs) with applications in nutraceuticals and functional foods. Should the ownership of the benefits of such GMOs be primarily in private hands, society at large may be prevented from accessing them. Bio-fortifying maize with higher levels of beta-carotene to prevent blindness, for consumption in Africa, is an example. As this research was conducted in non-private institutions, the new technique of breeding the high beta carotene maize is being made freely available across developing countries. The pursuit of such a technique may not have been undertaken by the private sector, given likely perceived low private returns on the investment. Should the private sector have undertaken this research, it is unlikely that the resulting technique would have been made freely available, thereby reducing its overall accessibility and the resulting social benefit.

Research is expensive. As research expense grows, the incentive to undertake research with a social benefit (rather than private cost-recovery) decreases. Beyond government cost sharing which uses cost recovery fees, there has been a general decline in government-funded support for research.

Case 2 Sources:

Galushko, V. and R. Gray, Benefits from Wheat Breeding Research in Western Canada, University of Saskatchewan, 2008

Marsh, J.M., 'The Effects of Breeding Stock Productivity on the U.S. Beef Cattle Cycle', M. Marsh, American Journal of Agricultural Economics, 81, May, 1999 p. 335-346

Frisvold, GB, J. Sullivan, A. Raneses, 'Genetic Improvements in Major US Crops: the Size and Distribution of Benefits', Agricultural Economics, V. 28(2), p. 109-119, 2002

International Food Policy Research Institute, 'Scientific Breakthrough Targets Vitamin A Deficiency in Africa', IFPRI Forum, March 8

Project Interviews

Case Study #3 - Irrigation in Alberta

Alberta's Irrigation Secretariat contributes towards the administration of the province's Irrigation Rehabilitation Program (IRP). The IRP is an on-going cost shared, multi-million dollar grant program that is based on annual agreements between the Minister and Alberta's thirteen irrigation districts. The IRP provides funding for the irrigation districts to use to rehabilitate their extensive water conveyance and storage infrastructure.

The IRP began in 1969 and is a cost shared program between Alberta Agriculture and Food and Alberta's 13 irrigation districts. Since 1969 funding levels have varied between $600,000 and $32,000,000 per year. The provincial/irrigation district cost share ratio has varied since 1969, starting at 86% province - 14% irrigation district, changing to 80% - 20% in 1994/95 and to 75% - 25% in 1995/96 and remains at that ratio today.

Irrigation Rehabilitation Financing Agreements are prepared annually between the Minister and each irrigation district. Projects must be approved by Irrigation Council prior to any project costs being paid for with cost shared funds, and all eligible project expenditures must be documented.

Irrigation has proven societal benefits beyond providing an essential utility to individual farms that in turn increases and stabilizes overall crop production. The agricultural industry as a whole benefits as the viability of individual farms increase. However, the provision of secure supplies of good quality water are essential for both rural and urban communities, destined for domestic, livestock watering, municipal and industrial uses.

Individual municipalities and the provincial government have developed parks and recreation areas on these water bodies to provide highly popular, water-based recreational opportunities that would otherwise not be possible. Irrigation diversions have also been used to develop habitat for wildlife.

Case 3 Sources:

Irrigation in the 21st Century (2002), Ch. 7, Benefits of Irrigation Development, Alberta Irrigation, available at http://www.aipa.ca/index.php/events/research/21st_century/

Alberta Irrigation Secretariat

Irrigation Rehabilitation Program 2006/2007 Status Report

Project Interviews

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Case Study #4 - Environmental Stewardship

There is increasing awareness of the value of environmental landscapes and preserving natural environments. In the EU, this has long been recognized and touted as multifunctionality where the agricultural and forested land have multiple uses, providing value in terms of agriculture, pleasant environmental aesthetic, a source of beauty, wildlife habitat, biodiversity repository, recreational and tourism opportunities. According to the EU, the concept recognises that the countryside is more than a food production base and that agriculture plays a crucial socio-economic and environmental role in rural communities and society at large. Multifunctionality has been a key feature of the EU's recent rural development and agricultural policies.

Canada is increasingly recognizing the multiple uses of agricultural and forested lands, and the value of protecting natural areas to preserve environmental ecosystems. The issue has been how best to motivate agricultural producers to facilitate and ensure environmental stewardship on their lands. A pleasant landscape or preserved wetland generally provides a societal benefit, but maintaining such a benefit on private lands generally imposes a cost upon the land's owner (by taking otherwise productive land out of agricultural production to preserve it, or because property taxes are levied upon non-productive land, for example). Left on their own, private landowners would provide the social benefits at sub-optimal levels. Therefore the issue becomes that of willingness to pay to protect the environment on private lands.

A recent partnership between the Governments of Canada and Manitoba encourages producers to undertake greater environmental stewardship on their lands. Part of the Beneficial Management Practices Program, the Environmental Suite provides funding for riparian area management. These include:

• The Riparian Tax Credit Program will provide funding for the implementation of a new program that will provide grants to agricultural landholders meeting specific sustainable landscape management requirements in riparian areas
• The Critical Wildlife Habitat Program will provide funding towards the identification, preservation and management of critical habitats in Agro-Manitoba, especially native grasslands and habitats of unique/rare/endangered species. Projects promote agricultural activities that incorporate wise land stewardship and effective management practices.
• The Riparian Area Management Program - funding for landowners to undertake environmental measures in riparian areas including:
  • exclusion fencing to prevent livestock from accessing waterways and grazing riparian vegetation
  • off stream watering systems as an alternative to allowing livestock access to streams
  • stream bank stabilization via the use of vegetative or mechanical methods to prevent erosion or deterioration of waterway banks
  • buffer strip creation to establish a strip of native vegetation along a waterway

Case 4 Sources

AAFC, 'Government Funding Boosts Programs Directed at Agriculture Business Skills, Food Safety and the Environment', July 15, 2009, available at: http://news.gc.ca/web/article-eng.do?m=/index&nid=467549

AAFC - Canada - Manitoba Implementation Agreement, Annex E

East Interlake Conservation District, Application Form, Riparian Area Management Program, available at: http://www.eicd.net/assets/ramp_application.pdf

European Commission, Europe's countryside - more than a food conveyor belt, available at: http://ec.europa.eu/research/environment/newsanddoc/article_3184_en.htm

Heather M. Rhodes, Louis S. Leland Jr., and Brian E Niven, 'Farmers, Streams, Information, and Money: Does Informing Farmers About Riparian Management Have Any Effect?', Environmental Management, V 30, 5, Nov 2002 available at: http://www.springerlink.com/content/5xw2cy7gubkbhalx/

Project Interviews

Case Study #5 - Electronic Medical Records (EMR)

The Government of Canada is facilitating the implementation of a nation-wide electronic medical record system. Traditionally, the health records of most Canadians have been handwritten on paper, stored in file folders at their physician's office, and therefore are not easily accessible to other health care providers.

To facilitate this transition, the Government of Canada created the non-profit agency Canada Health Infoway whose goal is to have all Canadians covered by electronic health records by 2016. The agency estimates that electronic health records will save the healthcare system $6 to $7 billion a year but will require a one-time investment of $350 per Canadian. As of June 2009, the Federal government has financed roughly $50 per person.

The transition of Canadians' health records into electronic format will give health-care providers a more accessible and complete picture of their patient's health history, improving care. Health Canada believes that electronic health records will:

• Save time and lives by reducing duplication,
• Improve the management of chronic disease,
• Improve access to care and boosting productivity
• Reduce wait times by speeding the flow of information through the system.
• Eliminate duplicate or unnecessary tests
• Reduce medication errors and remind health-care providers of necessary tests or vaccinations through automated alerts and reminders.

In the absence of a comprehensive electronic health record system, Canada Health Infoway believes for every 1,000:

• Hospital admissions: 75 people will suffer an adverse drug event.
• Laboratory tests performed: up to 150 will be unnecessary.
• Emergency room visits: 320 patients will have an information gap, resulting in an average increased stay of 1.2 hours.

However, the transition from paper to electronic health records is a costly process for all aspects of the health system. Physicians' offices must purchase software and hardware to make the initial transition (one Toronto doctor estimated this required an investment of roughly $30,000, with ongoing maintenance costs of $3,000 a year). Clinics and other health care service providers must also be integrated into the system via hard and software. Doctors' offices are private businesses that see little benefit from information sharing with the broader health system. As a result, they have underinvested in it - it is provided at a sub-optimal level.

Individual provinces are also facilitating the EMR process. In 2001, Alberta established the Physician Office System Program (POSP), an incentive program to encourage doctors to automate their practices. Under this program, eligible physicians are reimbursed 70 per cent of the cost of converting to a "paperless" office, including hardware, software and increased networking costs. The program also establishes standards and usability criteria for software, security, access, confidentiality, and protection of patient information. The POSP is supported by the Government of Alberta, Alberta Netcare, The Alberta Medical Association and Alberta Health Services. BC, Saskatchewan, Manitoba, Ontario, and Nova Scotia have since set up similar programs, however, Manitoba's program does not have a financial assistance component that helps defray the cost of converting.

As of April 1, 2009, one-third of BC's targeted eligible physicians had applied and enrolled in its EMR program. Nearly one-third of Nova Scotia's and just over a fifth of Saskatchewan's eligible physicians have adopted EMRs. Approximately 10 percent of Manitoba's eligible physicians have set up electronic medical record systems while in Newfoundland and Labrador, five per cent of doctors have gone digital, without an EMR program. Quebec, Prince Edward Island, New Brunswick and the three territories also do not currently have a provincial certification and/or funding program for EMR software.

Case 5 Sources:

The 'e' way - The state of electronic health records across Canada, CBC Last Updated: Tuesday, June 30, 2009

Digitizing healthcare - Electronic health records: potholes on the road to eHealth, CBC Last Updated: Wednesday, May 27, 2009

Minister confirms $500M for electronic health records, CBC Last Updated: Wednesday, February 11, 2009

Health care groups applaud funding for electronic health records, CBC, Last Updated: Wednesday, January 28, 2009

Health records: Canada lags in electronic medical records, CBC, January 28, 2008

Physician Office System Program

Richard Hillestad, James Bigelow, Anthony Bower, Federico Girosi, Robin Meili, Richard Scoville and Roger Taylor, 'Can Electronic Medical Record Systems Transform Health Care? Potential Health Benefits, Savings, And Costs', in Health Affairs, V24 (5), 2005, p. 1103 - 1117

Case Study #6 - Verified Beef Program (VBP)

The VBP is a verified on-farm food safety program for beef, which evolved from the Canadian Cattlemen's Association educational program, 'Quality Starts Here'. VBP utilizes HACCP, standard operating procedures for management practices, documentation and verification.

The implementation of the VBP was facilitated by government grants provided for program development, training, advertising, workshops and other aspects of the program's initial stages of development. Producers who chose to participate in the program could participate in workshops on how to achieve verification, received the producer manual and other assistance, at no direct cost to the producer. The program's verification procedure involved an auditing process to which producers are subject. The auditors were independent of the program, and producers were charged between $500 and $700 to undergo the verification audit.

One of the challenges encountered by VBP is a perception by many producers that the audit process is onerous in terms of time and too expensive, given that the benefits of the program would also flow to other sectors of the industry. Industry stakeholders have suggested that the funding for the program stopped one step prematurely and if the audit process had also been offered at no direct cost, more producers would participate. Stakeholders have further suggested that once they have been audited and certified under VBP, any other services producers received could be based upon cost recovery, but the cost of the verification audit was a disincentive to participate. If indeed this has been the case, the full societal benefits from the adoption of enhanced on-farm food safety will not have been achieved.

Similarly, for the Quality Starts Here program in beef, industry stakeholders have suggested that initial enthusiasm among producers cooled because of the high cost of compliance and of the audit process. Quality Starts Here was voluntary and as the transactions costs rose to comply, fewer producers participated. Without strong price signals in the form of price premiums for those participating in the program, adoption was bound to be low.

Case 6 Sources:

Verified Beef Program website

Project interviews

Case Study #7 - Parks Canada - Special Operating Agencies

Parks Canada is an organization dedicated to the protection of Canada's national parks, national historic sites and related cultural and heritage areas. Parks Canada also fosters public understanding, appreciation and enjoyment in ways that ensure the ecological and commemorative integrity of these places for present and future generations.

Parks Canada was created as a special operating agency in order to enable greater operating flexibility with relatively less risk and the ability to pursue cost recovery initiatives, more so than a typical government department. The creation of special operating agencies such as Parks Canada was part of a larger government strategy to move away from near-public goods funded purely by government to funding by a combination of tax revenues and cost recovery.

For Parks Canada, some means of cost recovery, both long and short term, include:

• Park fees for entrance into parks
• Leasing fees for homes and cabins and businesses
• Fishing licenses and camping fees

Parks Canada also considered fees for trail use with the intent of user pay, as well as fees for wood and the burning of wood but did not pursue these due to difficulties in enforcement. Some trails have become user-pay (e.g. the West Coast Trail) based on a system of permits which is both a means of cost recovery and of limiting usage. Essentially, Parks Canada attempts to provide a general public service under a user-fee mode but must still ensure the protection of the parks, sites and areas for future social benefit and the environment for non-users.

Parks Canada is also faced with unique challenges in that townsites and municipalities exist within the park system. Within these sites, a balance must be maintained between three layers of public and/or private goods or stakeholder benefits. Firstly there are the interests of society in general, which includes the park community overall, the environment, and Canadians in general. There are also the interests of the town residents and the interests of the private businesses and developers in the park. These stakeholders may have competing interests and, given the near-public good nature of a national park, allows one or more stakeholders to free-ride, sometimes to the detriment of the park amenity and/or other stakeholders.

For example, Parks Canada developed water and sewage treatment plants which were then turned over to municipalities to operate. Parks Canada completed the heavy infrastructure that the municipality could not afford to undertake, but also found means for communities to contribute back towards the public good of the park. Parks Canada gave towns greater local autonomy for local matters within town boundaries in exchange for their taking greater responsibility to maintain infrastructure and thereby contributing back towards the public good (the park). A town can also hire staff to enforce its bylaws (and the Parks'), that in turn also assist the park. Businesses must purchase licenses and pay taxes to the town, and leasing fees to the park, all of which also support the park. A tourism business operating in a townsite will charge significant fees to tourists, thereby directly benefiting from being located in the park. However, unless some enabling mechanism is instituted, that tourism business can benefit from the park but contribute minimally back towards it. In other words, the tourism firm profits precisely because it is located in the park but does not necessarily contribute back towards the public good (i.e. the park) unless some form of cost recovery is implemented. These would include business licenses and taxes paid to the town to support the park.

Essentially, the model envisions the overall public good (the park) being supported by Federal tax revenues through Parks Canada but also a proportion of the costs being borne by the businesses and individuals that benefit directly from being in the park (the towns, their residents and businesses in the towns).

Case 7 Sources:

Parks Canada website

Project interviews

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6. References

Agriculture and Agri-Food Canada (AAFC) (2009). Canada's Economic Plan: Harper Government Invests in new Livestock Traceability Initiative for Canadian Farmers and Consumers, AAFC News Release, Niagara-On-the-Lake, Ontario, July 10 2009.

Federal-Provincial-Territorial (FPT) Communiqué (2009). FPT Ministers of Agriculture Take Action to Strengthen Sector. Federal-Provincial-Territorial Communiqué, Niagara-on-the-Lake, Ontario, July 10 2009.

Buchanan, J.M. (1965). An Economic Theory of Clubs. Economica 32(125):1-14.

Economides, N. (1996). The Economics of Networks. International Journal of Industrial Organization 14:673-699.

Fellows, C.M., Flanagan, G.L., Shedd, S. and Waud, R.N. (1993). Microeconomics in a Canadian Setting. HarperCollins College Publishers, New York, 924pp.

Gardner Pinfold Consulting Economists Ltd. (2007). Costs of Traceability in Canada: Developing a Measurement Model. Agriculture and Agri-Food Canada. Cat No. A34-8/2007E-PDF. 40pp.

Golan, E, Krissoff, B, Kuchler, F, Calvin, L, Nelson, K and Price, G. (2004). Traceability in the U.S. Food Supply: Economic Theory and Industry Studies. Agricultural Economic Report Number 830, Economic Research Service, United States Department of Agriculture. Available at: URL: http://www.ers.usda.gov/Publications/AER830/

Gray, R., Fulton, M. and Furtan, H. (2007). The Provision of Goods and Farm Policy in Canada. Department of Agricultural Economics, University of Saskatchewan. Available at: http://www.ag-innovation.usask.ca/publications2.php

Hobbs, J.E. (2006). Traceability in the Agri-Food Sector: Issues, Insights and Implications. CAB Reviews: Perspectives in Agriculture, Veterinary Science, Nutrition and Natural Resources, 1, No. 29: 1-7

Hobbs, J.E., Bailey, D., Dickinson, D.L. and Haghiri, M. (2005). Traceability in the Canadian Red Meat Sector: Do Consumers Care? Canadian Journal of Agricultural Economics, 53(1):47-65.

Hobbs, J.E., Kerr, W.A. and Yeung, M.T. (2007) Identification and Analysis of the Current and Potential Benefits of a National Livestock Traceability System in Canada. Agriculture and Agri-Food Canada. Cat No. A34-9/2007E-PDF. 50pp.

Katz, M.L. and Shapiro, C. (1985). Network Externalities, Competition, and Compatibility. The American Economic Review 75(3):424-440.

Loppacher, L., Kerr, W.A. and Barichello, R. (2006). A Trade Regime for Sub-National Exports Under the Agreement on the Application of Sanitary and Phyto-Sanitary Measures. Canadian Agricultural Trade Policy Research Network, CATPRN Commissioned Paper CP 2006-3, 54pp. Available at: http://www.catrade.org

Mansfield, E. (1994). Applied Micro-Economics. W.W. Norton & Company, New York, 684pp.

Meuwissen, M.P.M, Velthuis, AGJ, Hogeveen, H and Huirne, RBM. (2003). Traceability and Certification in Meat Supply Chains. Journal of Agribusiness 21(2):167-181.

Schwägele, F. (2005) Traceability from a European Perspective. Meat Science 1:164-173

Serecon (2002). Economic Impacts of a Potential Outbreak of Foot and Mouth Disease in Canada. Canadian Animal Health Coalition, 41pp. Available at http://www.animalhealth.ca/

Smith, G.C., Tatum, J.D., Belk, K.E., Scanga, J.A., Grandin, T., Sofos, J.N. (2005). Traceability from a US Perspective. Meat Science 71:174-93.

Trace R&D (2009). Canadian Strategy for Traceability Research & Development 2009-2015: Backgrounder. Trace R&D 2009 Conference, Winnipeg, MB. http:www.umanitoba.ca/afs/trace/RD_Backgrounder.pdf

USDA (2009). Benefit Cost Analysis of the National Animal Identification System. NAIS Benefit-Cost Research Team, United States Department of Agriculture, 429pp. Available at: http://animalid.aphis.usda.gov/nais/

Zerbe, R.O. and Dively, D.D (1994). Benefit-Cost Analysis in Theory and Practice. Harper Collins Publishers, New York, 557pp

Acknowledgements:

The following individuals are thanked for their valuable input during the course of this project: Bob Friesen; Joe Garcea; Douglas Hedley; Bruce Huff; Kurt Klein; Shirley McClellan; Peter Rempel; Mark Silzer; Brad Wildeman. All errors and omissions remain those of the authors.

[1] See Hobbs (2006) for a more detailed discussion of definitions and scope of traceability. [Return to source]
[2] For example, Consumer Reports Used Car Reviews or an assessment by an independent mechanic. [Return to source]
[3][3] In some cases food safety is an experience attribute if a foodborne illness can be attributed to the consumption of a specific food product by those who consume it. [Return to source]
[4][4] This section draws upon a number of sources, including Zerbe and Dively (1994); Fellows et al (1993); Gray et al. (2007); Mansfield (1994). [Return to source]
[5][5] Assuming property rights are fully enforceable. [Return to source]
[6][6] Prior to congestion setting in. [Return to source]
[7][7] An added dimension in the case of traceability involves the establishment of a framework for governing authorized access to the information and privacy protection, which in the case of a mandatory traceability system may require some level of regulatory or legislative action by government. [Return to source]
[8][8] The Federal-Provincial-Territorial Traceability Task Team defines an 'emergency' to be "an abnormal situation which, to limit damage to persons, property, adverse economic impact, or the environment, requires prompt action beyond normal procedures" (Trace R&D 2009). [Return to source]
[9][9] Clearly, just because food is traceable does not necessarily mean it is safer. Traceability however can enhance our ability to limit the scope and scale of food safety problems, and to the extent that this is the case, should enhance food safety. [Return to source]
[10][10] Previous consumer research suggests that Canadian consumers are unlikely to be willing to pay for traceability information per se. However, traceability bundled with quality assurances is likely to have more value to consumers (Hobbs et al., 2005). [Return to source]
[11][11] They do benefit from anything that enhances the general 'safety of the food supply system' but that has been discussed separately. [Return to source]
[12][12]Different actors might have different degrees of success in accessing export markets due to a whole host of factors related to the abilities of firms, proximity to markets, differences in corporate strategy, etc. but that is a separate issue. [Return to source]
[13][13] Age verification information links animal birth data to individual (or group) animal identification information. [Return to source]
[14][14] In July 2009, federal, provincial and territorial ministers of agriculture (with the exception of Saskatchewan) committed to implement a mandatory national traceability system for livestock and poultry by 2011 (FPT Communiqué, 2009). [Return to source]
[15][15] This is currently on the negotiating agenda at the WTO. For a discussion of the issues encountered in establishing a set of effective trade rules on the recognition of disease-free zones, see Loppacher et al. 2006. [Return to source]

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