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Regulatory Approval Decisions in the Presence of Market Externalities: The Case of Genetically Modified Wheat

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  • Furtan, William Hartley
  • Gray, Richard S.
  • Holzman, J.J.

Abstract

This study examines the optimal approval strategy for genetically modified (GM) wheat varieties in Canada and the United States. Without an affordable segregation system, the introduction of GM wheat will create a market for "lemons" that will result in the loss of important export markets. Using a differentiated product trade model for spring wheat, with endogenous technology pricing, a payoff matrix is generated for the possible approval outcomes. Results show that the existence of the market externality removes the first-mover advantage for wheat producers from the approval of the new GM wheat variety. There are large distributional effects; wheat producers lose economic surplus, while consumers and the biotech company gain economic surplus. With a larger domestic market, the United States is more likely to experience net gain in economic surplus from the introduction of GM wheat.

Suggested Citation

  • Furtan, William Hartley & Gray, Richard S. & Holzman, J.J., 2005. "Regulatory Approval Decisions in the Presence of Market Externalities: The Case of Genetically Modified Wheat," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 30(1), pages 1-16, April.
    • Handle: RePEc:ags:jlaare:30778
    DOI: 10.22004/ag.econ.30778
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    References listed on IDEAS

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    1. Harvey E. Lapan & Giancarlo Moschini, 2004. "Innovation and Trade with Endogenous Market Failure: The Case of Genetically Modified Products," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(3), pages 634-648.
    2. Barbara J. Spencer & James A. Brander, 1983. "International R & D Rivalry and Industrial Strategy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(4), pages 707-722.
    3. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    4. W. H. Furtan & R. S. Gray & J. J. Holzman, 2003. "The Optimal Time to License a Biotech “Lemon”," Contemporary Economic Policy, Western Economic Association International, vol. 21(4), pages 433-444, October.
    5. Bruno Larue, 1991. "Is Wheat a Homogeneous Product?," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 39(2), pages 103-117, July.
    6. Julian M. Alston & Richard Gray & Daniel A. Sumner, 1994. "The Wheat War of 1994," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 42(3), pages 231-251, November.
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    Cited by:

    1. Johnson, D. Demcey & Lin, William & Vocke, Gary, 2005. "Economic and welfare impacts of commercializing a herbicide-tolerant, biotech wheat," Food Policy, Elsevier, vol. 30(2), pages 162-184, April.
    2. Wilson, William W. & Huso, Scott R., 2008. "Trait Stacking, Licensing, and Seed Firm Acquisitions on Genetically Modified Grains: A Strategic Analysis," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 33(3), pages 1-20.
    3. Kerr, William A., 2003. "Science-based Rules of Trade: A Mantra for Some, An Anathema for Others," Estey Centre Journal of International Law and Trade Policy, Estey Centre for Law and Economics in International Trade, vol. 4(2), pages 1-12.
    4. Zhu, Manhong & Schmitz, Andrew & Schmtiz, Troy G., 2016. "Why Has not Genetically Modified Wheat Been Commercialized: A Game Theoretical Perspective," 2016 Annual Meeting, February 6-9, 2016, San Antonio, Texas 230796, Southern Agricultural Economics Association.
    5. Furtan, William Hartley & Guzel, A. & Weseen, A.S., 2005. "Landscape Clubs: Co-existence of GM and Organic Crops," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24495, European Association of Agricultural Economists.

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