Laws, rules, and standards

2.45 All commodity systems operate within an institutional environment, consisting of a set of fundamental political, social, and legal ground rules. These ground rules establish the basis for production, exchange, and distribution. According to Ruttan and Hayami (1984, p.204), these ground rules "...facilitate coordination among people by helping them form expectations which each person can reasonably hold in dealing with others...[They] provide assurance respecting the actions of others and give order and stability to expectations in the complex and uncertain world of economic relations." The institutional environment governing a commodity system consists of several different types of rules, the most important being: l) rules defining, allocating, and enforcing property rights (for example, property and bankruptcy laws); and 2) rules and conventions defining permissible and nonpermissible forms of cooperation and competition (for example, standards, licensing rules, laws of contract and liability, company and cooperative laws, and 'fair trading' conventions).

2.46 A well articulated and consistently enforced system of property rights is a fundamental precondition for efficient exchange within commodity systems. Clarity over the ownership and the rights to use, trade, and alter assets is vital to market development since this assigns to individuals the rights to benefits (and the burden of losses) from specialized production and marketing activities (Bromley (1986)). The general system of property laws places boundaries on participant behavior and expectations and, in doing so, increases the scope for coordination.

2.47 Rules and conventions specifying entry conditions and boundaries on cooperative and competitive practices may also facilitate exchange and coordination. For example, The establishment and enforcement of standards can reduce transaction costs by increasing the available information to buyers and consumers. Standards, which may include basic weights, measures, and quality grades, provide farmers and marketing agents with a more exact language to communicate offers, a norm to compare actual with expected behavior, and a more detailed and objective view of the actual outcome. Quality standards may be mandatory or voluntary; they may be minimum standards or include multiple grades. They are especially important when trade takes place over large distances and among strangers as standardized goods can more easily be traded 'on description'.

2.48 The licensing of producers and marketing agents can also facilitate trade by reducing transaction costs. This would occur where the criteria for licensing centers around the asset-holdings, past experience, financial solvency, and other proxies for competence for the enterprises in question. In such cases, a public or collective authority would provide an initial screening of the capabilities and credibility of alternative suppliers and buyers. Performance incentives are built in since suppliers of substandard produce would risk revocation of license.

2.49 As food products become more complex and varied, consumers cannot be expected to have full knowledge about the choices available to them and the quality of products on offer. The food supplier has the incentive to supply just enough information that will differentiate its product(s) from its competitors, but no more. In order to enable consumers to make more informed decisions and to protect themselves from potentially harmful products and practices, regulations may be established requiring certain tests or inspections of products, certain handling or processing procedures, certain nutritional or other labels, and truth-in-advertising.