Economic Impacts of Regulations Governing the Development and Dissemination of Animal Agricultural Biotechnologies*

Judith I. Stallmann

Assistant Professor
Department of Agricultural Economics
Virginia Tech
Blacksburg, Virginia 24061

[*this paper was prepared for the NABC 4 Saturday Seminar, but was not presented due to illness.]

I would like to begin my discussion with some words of wisdom garnered from the past:

That the automobile has reached the limits of its development is suggested by the fact that during the past year no improvements of a radical nature have been introduced.
(Scientific American, January 2, 1909)

I think there is a world market for about five computers.
(Thomas J. Watson, Chairman of the Board, IBM, 1943)

There is some work best done by horses for which tractors are not suited.
(Farm Journal, 1923)

I suspect that much of the discussion today, several years from now will sound very much like these quotes. In the area of new technology the final outcome of that technology is difficult to predict from the first products that appear on the scene because there are so many unknowns — the development of transistors and integrated circuits in the case of computers and equine fever in the case of tractors — and new uses that come on the scene.

Risk Management

Regulations are a way of managing risk. Risk management includes hazard-reducing or risk-reducing actions and enforcement of actions believed to reduce risk (Marois, Grieshop and Butler). Regulation of biotechnology has created a lot of controversy with one side saying that biotechnology needs more regulation and the other side saying existing regulations are sufficient.

From a toxicology approach, some biotechnology products have different characteristics than chemical substances for which the toxicology approach was developed. Chemical substances degrade over time and space so residue analyses is used. Some biotechnology products are living organisms which replicate and spread, rather than degrade, over time and space (Marois, Grieshop and Butler). Thus, whether existing regulations are sufficient is open to question given that some biotechnology products may increase rather than degrade over time and space.

Approaches to Risk Management: Regulation and Judicial Law

Risk management tools are ex-ante (regulation), and ex-post (judicial law). Both are intended to reduce the probability and/or size of an event occurring. An ex-ante approach imposes controls “before the fact” or independent of the occurrence of a specific event (Marois, Grieshop and Butler). Standards and guidelines are examples of an ex-ante approach to risk management. Ex-post (judicial law) or an “after-the-fact” approach is dependent upon the occurrence of an event and it allows damages to be recovered for harm done (Marois, Grieshop and Butler). Liability and negligence rules are examples of the ex-post approach.

For those of you interested in modeling of the impacts of various approaches I refer you to the USDA publication by Larson and Knudson. They examine both ex-ante and ex-post approaches. They examine each individually. In actuality we usually have both ex-ante and ex-post approaches combined. Although Larson and Knudson’s models can be modified to combine approaches, they have not done so. An article by Segerson suggests that when the consumer and the producer have different risk preferences, relying on just one approach will not achieve a socially optimal allocation of risk damages and incentives for hazard reduction. Both ex-ante and ex-post approaches may be needed to achieve an efficient public policy solution (Marois, Grieshop, and Butler).

Ex-post or Judicial Law

The y approach requires an occurrence, such as an injury. The intention then is to compensate the victims of the injury or to recover damages.

Under strict liability one party must take the precautions and the injured party must show that the damage was caused by that party. Since the injured party must prove causation there is some uncertainty in the outcome. The uncertainty can lead to too much or too little precaution.

The negligence approach requires both sides to take precautions. The burden of proof on the injured party is more difficult because the injured party must also prove that they were not negligent. Since there is even greater uncertainty of outcomes under negligence than under strict liability, Johnson and Ulen find negligence is even less likely to result in socially optimal outcomes than is strict liability.

Larson and Knudson find that when the research firm is small (i.e., wealth relative to the potential returns) and the potential damages from the firm’s activities exceed the value of the firm, the liability rule reduces the incentives to take precautions. Uncertainty in legal outcomes also reduce the incentive for precautions.

Ex-ante Regulation

First I want to clarify the definition of the word “regulation” which I have been using very broadly to this point. There is also a narrower use of the word: specific rules, which must be followed. To avoid the confusion of the broad and narrow senses of the word I will try to use the word “standard” when speaking narrowly. Standards are an ex-ante approach. They tend to be highly specific, defining procedures that must be used or that cannot be used. Failure to follow these standards carries legal penalties, including fines, even if no injury occurs. If injury occurs there will be liability. Because of the legal codification, standards tend to be difficult to change. In a new area of technology, changes of standards will be needed. (I refer you to my opening three quotes to underline this point.) Outdated standards may become a large burden on research.

Another ex-ante approach is guidelines. Guidelines are suggestions or recommendations of acceptable practice. There are no legal penalties for not following guidelines (Marois, Grieshop and Butler). There may be institutional penalties for not following guidelines, such as loss of funding. If guidelines are not followed and damage results, there will be liability for damages. Guidelines tend to be more easily changed than standards, as more information becomes available.

An open question is whether there is liability, if standards and guidelines are followed and damage occurs anyway.

Larson and Knudson find that with standards alone, the firm loses wealth to safety measures, whether or not an event occurs. If the firm engages in both risky and non-risky activities, it will have an incentive to put more assets in the risky activity to equalize the rates of return between the two activities. I will point out here that Larson and Knudson did not analyze the situation of standards and liability combined.

Current Regulatory Environment

Regulations on transgenic animals can be on the research process, field testing, manufacture and production of the product and/or on the end product. For transgenic animals there are currently regulations in place on experimental animals - how the experimental animals are treated, the precautions to be used, and how animals are disposed of. Beyond that point it is very unclear what is to be done (Figure 1). For example, how do you dispose of an animal from a production herd that produces a human protein in its milk? Will it have to be burned, can it be buried, can it be sold as food?

In the area of transgenic fish the regulatory issues are even more uncertain. In fact the uncertainty at the moment may be a bigger hindrance to research and product development than the regulations.

Mackenzie and Vidaver report researchers were most likely to be discouraged from conducting field test by press reports and by regulatory uncertainty. They go on to observe a “near-passive acceptance by the private-sector scientist of regulatory requirements...” I have not observed passive acceptance by the private sector. But, if uncertainty is a major problem, then any regulations, which decrease uncertainty, may be seen as preferable.

Figure 1. Current Regulations on Transgenics
  Plants Animals Fish
Research X X  
Field Testing X ?  
Manufacture/ Production      
End Product X X ?

The Future of Biotechnology Regulation

One question for the future is whether the regulations will come in the form of standards or guidelines. Guidelines will allow more flexibility for the individual research project.

A second big question for the future is the issue of who will regulate. When I say this, many of you are thinking FDA, EPA, NIH, USDA, etc., which the Coordinated Framework is supposed to have worked out. That framework does not discuss transgenic animals. In addition it focuses mainly on small-scale introductions and has little guidance on commercial introductions (Nicholas).

But there is also an issue of whether the federal government or the states will regulate (or even local governments). Take the example of product labeling. When it came to nutritional labeling, the food industry opposed federal regulation until it realized that without federal regulations each of the 50 states might impose their own standards which would be much more costly. At that point the industry was willing to work with the federal government to get labeling requirements they could live with. The NIH guidelines also came about because scientists decided to take a role in regulating themselves rather than leaving it up to someone else.

The third issue is, are you going to regulate the product or the process? The Coordinated Framework says the product is the regulatory focus, not the process (Nicholas). Yet to date the regulatory focus has been on the process and I doubt that those regulations will disappear.

Patenting of Transgenic Animals

Everything I have read on the patenting of transgenic animals (which is very little because not much has been written) concentrates on “farm animals". The discussion focuses on the rights of farmers to use the progeny and mechanisms for royalty collection. The concern about the difficulty of royalty collection leads me to suggest that the emphasis on farm animals is misplaced.

Patent law says you may be eligible for a patent but it does not guarantee you that the product will be profitable. In addition the government does not enforce the patent for you, you must enforce or police it yourself. Research on plants suggests that because of the difficulty of policing or enforcing a patent when the patented product is widespread and easily copied, there will be very little investment in these types of products (Stallmann).

Based on these observations it seems likely that investment will concentrate on specialty animals because the potential return per animal is much higher and policing will be easier. For example, a pig, which produces a human protein in its milk, has a much higher potential return per animals than does a pig with a leaner carcass. In addition, the specialty pig will be kept in herds easily policed by the company (maybe even owned by the company) rather than being spread among thousands of farms where policing becomes nearly impossible.

As the industry increases in concentration (such as poultry), policing of a patent becomes easier. Concentration becomes easier as the number of offspring per animal increases so that few animals are needed for the breeding herd.

It should also be remembered that a patent, by making a product valuable, creates incentives for infringement.

Summary

Both ex-ante and ex-post approaches to risk-management are needed to achieve the socially optimal allocation of risk damages and incentives for hazard reduction. Uncertainty about regulation is also having an impact on animal biotechnology research. How the issues of standards versus guidelines, federal versus state regulation and product versus process regulation are resolved imply different costs. Because of the structure of patent law, research will more likely concentrate on specialty, rather than “farm” animals.

References

  • Johnson, Gary V. and Thomas S. Ulen. “Designing Public Policy toward Hazardous Wastes: The Role of Administrative Regulations and Legal Liability Rules,” American Journal of Agricultural Economics 68(5):1266-1271. 1986.
  • Larson, Bruce A. and Mark K. Knudson. “Public Regulation of Agricultural Biotechnology Field Tests: Economic Implications of Alternative Approaches,” Technical Bulletin No. 1793. Economic Research Service, United States Department of Agriculture. August 1991.
  • MacKenzie, D.R. and Anne K. Vidaver. “U.S. Biosafety Regulations: Too Much or Not Enough?” in Bill R. Baumgardt and Marshall A. Martin (eds.). Agricultural Biotechnology Issues and Choices. West Lafayette, Indiana: Purdue University Agricultural Experiment Station, 1991.
  • Marois, James J., James I. Grieshop, and L.J. (Bees) Butler. “Environmental Risks and Benefits of Agricultural Biotechnology.” in Bill R. Baumgardt and Marshall A. Martin (eds.) Agricultural Biotechnology: Issues and Choices. West Lafayette, Indiana: Purdue University Agricultural Experiment Station, 1991. pp. 67-80.
  • Nicholas, Robert B. “Is Regulation the Gatekeeper?” in June Fessenden MacDonald (ed.). Agricultural Biotechnology at the Crossroads: Biological, Social and Institutional Concerns, NABC Report 3. Ithaca, New York: National Agricultural Biotechnology Council, 1991. Pp. 111-119.
  • Segerson, Kathleen. “Risk Sharing in the Design of Environmental Policy.” American Journal of Agricultural Economics 68(5):1261-1265. 1986.
  • Stallmann, Judith I. “Impacts of the 1930 Plant Patent Act on Private Fruit Breeding Investment”. Ph.D. Dissertation. East Lansing, Michigan. Department of Agricultural Economics, Michigan State University, 1986.