Wednesday, September 22, 2010

Beeronomics: Information Economics and Organic Beer

In economics information plays a pivotal role in the efficiency of markets.  One of the assumptions that underlies the result that free markets are Pareto efficient (i.e. maximize total welfare surplus) is that there is full and complete information.  What this means in a product market (among other things) is that consumers know everything there is about a product and can therefore value it appropriately before you buy.  I have blogged about this in terms of beer - highlighting the fact that with a new beer you don't really know until you try how much you value a particular brew.   But this general principle applies in many areas, you might value locally sourced ingredients and be willing to pay more for them at a farmers market for instance, or you might prefer to buy milk from cows that are not given growth hormones.  But you don't know unless you are told whether produce is local or milk is BGH free.  [And by the way this has nothing to do with whether milk from BGH free cows is better or healthier, only if consumers value it differently - but presumably consumers value it differently because they believe there is a difference or some positive probability that there is a difference]

So suppose you value products that are Organic and therefore decide to buy a Deschutes Green Lakes Organic Ale.  This is a beer that is considered organic per the USDAs guidelines.  Ah but wait, it turns out that it is only the malted barley that is grown organically, the hops, according to current USDA rules are allowed to be used in non-organic form in an organic beer (apparently one of only three whole crops thus allowed).   Jeff at Beervana has a nice follow-up blog post explaining the organic rules and the exception.  The justification for this exception for hops is that there are currently too few organic hops being grown (apparently they are very difficult to grow 100% organically).  The irony is that a main reason there are so few hops grown organically probably has a lot to do with the exception itself.  If you can call a beer organic that uses non-organic hops, there is little reason to try and get organic hops and little reason to try and grow them.

Business wise, this is frustrating to organic hop growers - a USDA ruling ending the hops exception would be huge, it would instantaneously create a massive demand.  Economically speaking, the exception creates a market failure for the reasons I mention above.  I am a pretty enthusiastic craft beer enthusiast and until I read Jeff's post I had no idea of the hops exception so I am willing to bet that most consumers don't know either.  This means they cannot accurately value the beer they buy and a sub-optional market outcome results.

Brewer Matt Swihart of Double Mountain commented on Jeff's post and added that:

In terms of ethicality, I've always felt it disingenuous to label a beer 100% organic when made with conventional hops. It is misleading the consumer as hops are grown under substantial pest pressure while barley is a reasonable "soft" crop to grow in that conventional farming of barley requires very little pesticide and nitrogen use. Organic barley and conventional barley have very similar environmental footprints...
So it is possible that it is really hops that matter when consumers are looking for and choosing to buy 'organic beer.' [As an aside, consumers might like organic because they like the idea of limiting chemical applications in the environment, in which case Matt's analysis is correct, or they might like it because they think it is a healthier alternative, in which case I am not so sure as hop vines might be treated before they flower and thus the flower itself might not have any chemical residue whereas barley might retain the residue.  Anyone know?]

Now there is a way forward without the USDA.  If brewers started using organic hops and labeling their beer as 'made with all-organic barley and hops' this might start to alert consumers to the difference and might spur demand for organic hops. As an economist there are few things as universal as the fact that more information is better for the efficiency of markets, so I support any effort to provide more accurate information about all goods.

As a parting note, Matt also points out that:    
"...brewing is carbon positive. Growing the hops and barley for beer produce more carbon than consumed in the production of the crops and the beverage. What a beautiful thing. Save the planet! drink a beer!"
I don't know if Matt is including transportation and refrigeration in this, but who cares? It id another good reason to have a beer.  And by the way, if you haven't had Double Mountain beer - what the heck is wrong with you?  Matt's beers are sublimely crafted and his commitment to the highest quality ingredients is evident in the beer.  Go find some.

2 comments:

daniel said...

i would not say Pareto efficient is equivalent to 'maximizing total welfare' (which i think you imply) - to max welfaer i would think you'd need a social welfare function - and whatever it is, Pareto efficiency would not be sufficient to guarantee it's maximized - right ?

Patrick Emerson said...

Good catch, you are absolutely right - I meant to say maximizing total surplus, which is not the same thing.