Course:ECON371/UBCO2009WT1/Group 7/Article3

This "fear of unknown longer-term health effects" is an interesting rationalization for the ban of GMO crops considering the lack of nutritional value seen in the diet of some parts of the EU, such as England. The predominant diet in England consists of high levels of processed foods, which are reported to have very low nutritional value. Considering this, GMO or not, eating flax seeds could be a very beneficial dietary modification for the population.

However, GMO crops have an information inefficiency in a number of ways, particularly that the long-term effects are mostly unknown. The cost of consuming GMO crops may be very high and may be much higher than that of the positive effects the food provided has.

Canada does report to be investigating this issue since sales agreements for flax with the EU always contain a "no GMO" clause. European Union consumers are reluctant to consume genetically modified crops, according to Reuters due to a "fear of unknown longer-term health effects." Not all GMO crops are banned, but all GMO flax imports are.

Clearly such a scenario may add an increased cost in terms of buyer's "unknown" risk when purchasing Canadian crops, a factor which will hinder sales of crops from Canada until the issue is resolved. This occurs because a buyer in the European Union, knowing he cannot sell GMO modified flax, accepts a level of risk with regard to buying crop from Canada.

This effect is demonstrated in the sharp fall of the price of Canadian flax, currently "well below" the normal price of $10-$11 per bushel. This drop in price of flax can decrease the willingness to pay of the EU consumer, decreasing the demand for flax. However, for the consumers that do not mind consuming GMO products, this drop in market value is beneficial to them, and their demand for flax may go up, also increasing their willingness to pay, which in turn increases consumer surplus. The Canadian market of flax is still open to the United States, so I would assume they are benefiting from this decrease in price of flax.

In this case, the willingness to accept is clearly much larger than the willingness to pay of the EU consumer. The EU would need to be drastically compensated to consume the GMO flax rather than consume it with no cost to the farmer.

The expected cause of this issue is a rouge (or simply irresponsible) farmer who has planted GMO crop, known as FP967, and sold it to the flax board as unmodified crop. This results in an irrational rent provided to the farmer for his crop (which is misrepresented at market), and due to the externality of being unable to easily separate the crop from the mass vats that the total supply is stored in. This scenario could mean that Canadian crop this year will not sell at market.

If two flax crops are grown next to each other, one being GMO and one naturally grown, conserving a pristine environment in which the two crops are not mixed is virtually impossible. Unless the GMO flax crop is in a closed environment, it can and will contaminate other crops, which would be considered as a negative externality. When the GMO flax crops crops were destroyed in 2001, all flax crops within a reasonable distance (in which other crops could have been contaminated) should have been destroyed to completely get rid of all GMO flax crops. This would have drastically decreased the Canadian flax market for a few years after the fact, but the current situation with the EU would have been avoided.

The Canadian Grain Commission is researching and testing flax samples to attempt to locate the source of the GMO product and, assumedly, punish the farm responsible.

Growing GMO crops can have devastating effects on the environment in terms of conservation biology. Conserving the natural, untouched environment is the ideal scenario, and growing GMO crops can create invasive species which take over others. However, on the other hand, not taking conservation into consideration, growing GMO crops can be very beneficial since scientists can genetically modify a species to be more resilient to the current environment, not needing as much attention from the farmer, also reducing the cost. Therefore, the farmer is forced to make a choice between growing a GMO crop or not. The cost and benefits of the trade off are analyzed. It would be assumed that the GMO crop would cost less, and would generate greater profit. Also, it would be more efficient for the farmer since environmental damage of growing a GMO crop has no monetary value, so the individual (farmer's) benefit would out-weigh the cost. Growing a natural crop can require more pesticides and more water, increasing the cost of growing the crop. However, the benefit to growing a natural crop would be conserving the species. Moral aspects are involved in this decision which can make the decision on which path to take unclear.

Clearly, this means that the dichotomy between GMO and non-GMO crops demonstrates a dichotomy in measuring and properly assigning negative values for the social welfare function, i.e., the farmer sees a clear benefit (assuming the market/citizens/buyers are on the same level and don't have unmeasured moral posturing) from growing GMO crops (getting a larger crop for less investment) while increasing the risk of ecosystem destruction (a cost which is not properly attributed).

Prof's Comments

GMO crops are a very interesting issue. The fear by the EU may mean that the demand curve is far below where it should be if the risks were fully known. This would mean that an inefficiently low amount of flax is being consumed, and that the price is very low. There is certainly a perverse incentive created in our marketing system, where grain from many producers is combined for export sales. As you allude to, one farmer could try to free ride by using GMO flax. If she gets away with it, she earns more profit because her cost is lower than those who don't use GMO seed. There is tremendous uncertainty about what the true external cost of using GMO seed is.