Below is a story about regulating the Kiwi market and how a federal mandate set

Question

Below is a story about regulating the Kiwi market and how a federal mandate set a minimum maturity standard for kiwis to solve the problem of adverse selection.  After reading the application, I would like for you to reflect on this scenario and see if you could come with an alternative solution that would not have involved a government mandate or the use of government at all.  Share your alternative with the class, and give others feedback on their ideas.  Ultimately, do you think the government mandate was necessary, and was it good or bad thing? Microeconomics.

•Kiwifruit is subject to imperfect information because buyers cannot determine its sweetness—its quality level—by simple inspection.

•There is asymmetric information because producers know the maturity of the fruit, but fruit wholesalers and grocery stores, who buy fruit at the time of harvest, cannot determine whether a piece of fruit will be sweet or sour.

•Before 1987, kiwifruit from California suffered from the “lemons” problem. Maturity levels of the fruit varied across producers. On average, the sugar content at the time of harvest was below the industry standard.

•In 1987, California producers implemented a federal marketing order to address the lemon–kiwi problem. The federal order specified a minimum maturity standard, and as the average quality of California fruit increased, so did the price. Within a few years, the gap between California and New Zealand prices had decreased significantly.

Explanation / Answer

Sellers should segregate the Kiwi fruit based on the maturity level. Fruits which are more sweet should be kept in one category and the less sweet fruits in another category and based on that the price needs to be fixed. Customers should also be vigilant enough to check the quality level and then purchase the fruit. Thus the customers should purchase and pay the price based on the quality level and the level of sweetness.

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