Is There a Market Failure in the Market for Prepared Foods?

Is There a Costs vs. Benefits Rationale for Government Intervention?

A recent article in the NYT, “Citing Hazard, New York Says Hold the Salt” by William Neuman, discusses how the government of New York City plans to “encourage” manufacturers to decrease the salt content in their prepared foods:

On Monday, the Bloomberg administration plans to unveil a broad new health initiative aimed at encouraging food manufacturers and restaurant chains across the country to curtail the amount of salt in their products.

The plan, for which the city claims support from health agencies in other cities and states, sets a goal of reducing the amount of salt in packaged and restaurant food by 25 percent over the next five years.

Public health experts say that would reduce the incidence of high blood pressure and should help prevent some of the strokes and heart attacks associated with that condition.

… the changes it [the city’s salt campaign] prescribes require cooperation on a national scale, city officials said, because major food companies cannot be expected to alter their products for just the New York market.

And removing salt from many products can be complicated. Salt plays many roles in food, enhancing flavor, preventing spoilage and improving shelf life. It helps bread to rise and brown.

… While most food companies say they agree at least with the goal of reducing salt, some medical researchers have questioned the scientific basis for the initiative, saying insufficient research had been done on possible effects. While agreeing that reducing salt is likely to lower average blood pressure, they say it can lead to other physiological changes, some of which may be associated with heart problems.

As a free market economist, my instant reaction to such government intervention was one of horror. After I had calmed down, I tried to take a more rational approach to the issue by looking for any economic rationale to explain the government's action. That is, I asked myself: When would it be the government’s place to intervene in the market for prepared foods and “encourage” manufacturers to use less salt?

Is There a Market Failure in the Market for Prepared Foods?

Generally speaking government intervention into a free market can be justified if there is a market failure, which Wikipedia defines as follows (emphasis mine):

In economics, a market failure exists when the production or use of goods and services by the market is not efficient. That is, there exists another outcome where market participants' overall gains from the new outcome outweigh their losses (even if some participants lose under the new arrangement). Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point-of-view…

Market failures are often associated with non-competitive markets, externalities or public goods. The existence of a market failure is often used as a justification for government intervention in a particular market.