Markets with Untraceable Goods of Unknown Quality: A Market Failure Exacerbated by Globalization

Abstract

In markets for fruits, vegetables, and many imported goods, consumers cannot discern quality prior to purchase and can never identify the producer. Producing high-quality, safe goods is costly and raises the collective reputation for quality shared with rival firms. Minimum quality standards imposed on all firms improve welfare. If consumers can observe the country of origin of a product, quality, profits, and welfare increase. If one country imposes a minimum quality standard on its exports, consumers benefit, the profits of firms in the country with regulation rise, and the profits of firms in countries without regulation fall.