How do GM / non GM coexistence regulations affect markets and welfare?

This paper presents a theoretical economic model assessing the effect of the level of mandatory genetically modified (GM) / non-GM coexistence regulations on market and welfare outcome. We assume vertical differentiation of GM and non-GM goods on the consumer side. Producers are heterogeneous in their cost savings from GMO adoption. Producers of nonGM crops face a probability of having their harvest downgraded if gene flow from GM fields makes its GMO content above the labeling threshold. The government may impose to GMO producers mandatory ex ante isolation distances from non-GM fields in order to decrease the probability of non-GM harvest downgrading. It may also introduce an ex post compensation to non-GMO farmers for profit losses due to harvest downgrading, imposing GMO farmers’ participation to a compensation fund via a tax on GM seeds. Assuming endogenous crop choices and prices, we study the effects of ex ante regulation and ex post liability of GMO producers on market equilibrium as well as on global and interest group welfare.