A Note on the Economic Rationale for Regulating Health Claims on Functional Foods and Nutraceuticals: The Case of Canada

Introduction Regulating health claims continues to be among the highly contentious regulatory challenges involving functional foods, nutraceuticals and, more broadly, natural health products. (1) The potential effects of regulations on health claims are multifaceted, and a substantial body of literature has recently emerged examining impacts on innovation/product commercialization, marketing/advertising, promotion of healthy consumption patterns and international competitiveness. (2) We aim here to give an overview of the economic rationale for regulation of health claims, hopefully in a manner that is accessible to both an audience of economists and non-economists. The premise of regulating health claims is to remedy market failures arising from imperfect information in food markets. (3) Proponents of health claim regulations solicit greater regulatory intervention and, at the extreme, near prohibition of health claims. They argue that incentives are rampant for manufacturers to deceive and/or mislead consumers because claimed health effects cannot be easily verified by consumers, (4) providing scope for 'false' product differentiation. In contrast, opponents of such restrictive regulations on health claims have argued that direct information provision through product labels is an effective approach to informing consumers about potential positive health effects that could not be acquired through pre-consumption information-seeking or post-consumption experience. (5) Further, opponents of regulations argue that, by restricting the provision of information through health claims, consumers are 'kept in the dark' and that the consequent welfare losses to consumers are typically much greater than the potential costs associated with deception. (6) Indeed, there is a substantial body of evidence supporting the notion that provision of information on health effects through product labels not only brings about positive changes in consumer dietary choices, (7) but also intensifies market competition among manufacturers for the supply and disclosure of valued product attributes, in turn enhancing consumer choices. (8) We contend that both sides of the debate on regulating health claims are centered around, to a large extent, the degree of consumer verifiability of the claimed deliverables, in terms of health effects of product consumption, and that the extant literature tends to gloss over this important aspect. (9) The purpose of this conceptual note is to bridge this gap in the health claim regulations literature. Our arguments and reasoning are borrowed from the literature on the economics of advertisements as information, (10) where claims on product attributes have been examined in terms of their ability to provide truthful and verifiable information to consumers, and in terms of the role of market forces when information verifiability varies across product attributes. We tailor our analysis to view health claims through the lens of information economics and conclude by outlining the potential remedies for certain information failures through the regulation of health claims. In particular, we highlight the potential role of biomarkers that are used to assess disease risk reductions as a remedy for informational failures. Verifiable and authenticated information on such biomarkers related to long term health effects of functional foods and nutraceuticals could be used to remedy the informational failures. The information requirements for this transformation can be considered a public good and, thus, public provision and authentication of such information becomes the prima facie case for regulation of health claims. Regulation of Health Claims (11) The Codex Alimentarius Commission has proposed a health claim as any claim establishing a relation between a food or a constituent of that food and health, (whether it is good health or a condition related to health (or disease)) ... or . …

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