Introduction

A crucial aspect of standards is that they have both efficiency and equity effects, and that these effects may be influenced by various factors such as consumer preferences, implementation costs, and so forth. Standards may enhance aggregate welfare, but they may also be set at suboptimal levels, causing welfare losses. Moreover, the introduction of a standard may create winners and losers in society as its effects can differ for consumers and producers, and even within consumer and producer groups.

To illustrate these effects and to show how to derive them formally, we start by developing a closed-economy model to identify efficiency and equity effects of public standards that address problems of asymmetric information. In later chapters, we use this model to analyze the political economy of standards (Chapter 4), and we subsequently extend this model to an open-economy framework (Chapter 5), compare different types of standards (Chapter 6), and move from a setting with public standards only to a situation with both public and private standards (Chapter 7).

In our basic framework, standards generate efficiency gains by solving (or reducing) asymmetric information problems (see Chapter 2), but they also involve implementation costs. We show that under these assumptions, standards involve rent redistribution between consumers and producers. When there is variation in implementation costs, standards may affect producers differently according to the producer's type and the standard's implementation costs.

The chapter is organized as follows. We first introduce the basic closed-economy model. We then analyze the impact of a change in the public standard on aggregate consumer surplus, producer surplus, and welfare, for three different cases. In the first case (Section 3.3), there are no implementation costs related to the standard. The second case (Section 3.4) introduces these implementation costs and the third case (Section 3.5) analyzes the effects when implementation costs are different between different types of producers.

The Model

Consider the market for a “credence good,” that is, a good with certain characteristics that cannot be determined by the consumer, either by search or experience, although consumers value the presence of these characteristics if positive, respectively their absence if negative (Darby and Karni, 1973; Nelson, 1970).

As discussed in Chapter 2, a standard that guarantees certain credence features of the product positively affects consumer utility as it reduces or solves informational asymmetries.