Econ in the News: Cottage Food Deregulation

As of January 1st, 2019, the cottage food industry in California has received a major legislative boost: a wider variety of foods made in a home kitchen can now be legally sold with fewer permit restrictions. I want to examine questions of deregulation, substitution, and cognitive biases that feed into the cottage food debate.

First off, let’s touch on what exactly the new law promises. The bill (AB-626) stipulates that each county in California may now decide if they want to allow for permitting of less-restrictive (and somewhat-vaguely defined) “microenterprise home kitchen operations”. Furthermore, people who apply for a permit under this new law must sell food made on the same day, sell no more than 60 meals a week, and make no more than $50,000 a year, among other restrictions.

These restrictions mean that true “deregulation” is still limited, especially because one county can outright prevent any of these “microenterprise home kitchens” from existing in their area. Since entry and exit from one county to another means moving to a new house, which is a big undertaking (especially in California’s housing market), counties are likely not influenced by one another to accept or reject this new permit category, which may lead to mixed implementation across the state. From a simple economic lens, we note that all these permitting restrictions (including the availability of permits themselves) constitute substantial barriers to entry. Using positive (descriptive) economics, permits hinder a competitive market equilibrium. With normative economics, we might also raise the question of inequality generated by these barriers; those who can afford to pay for the permits and take the time to read through all the restrictions may not be the people who could really use a permit to generate substantially more income for their family.

The second facet examines why so many restrictions are placed on the cottage food industry, as well as why any deregulation was even proposed in the first place. The origin of AB-626 can be traced back to Josephine, a now-defunct cottage food startup focused on connecting people who wanted homemade meals to people who were good at whipping them up. Josephine, along with other similar companies, ultimately folded because of mounting legal challenges from health and county officials (although a version of their bill was ultimately passed). It seems that these officials view cottage food operations as substitutes for other restaurant venues controlled by the county via permitting. If cottage foods are able to expand, one might also expect resistance from restaurant lobbies, the extent to which would be determined by the degree of substitutability. Grocery stores likely have mixed opinions on cottage foods, depending on whether the stores serve many hot or pre-packaged meals that could also be viewed as substitutes with a homemade cottage food meal. Of course, expanded cottage food operations have the potential benefit local grocery stores overall (home chefs have to buy their ingredients somewhere).

Health and county officials weren’t just worried about less permit power (and the income that goes along with health inspections). Many critics of cottage food laws claim that it increases the risk of foodborne illness, since home kitchens lack the same amenities as a commercial kitchen. This is where a little behavioral economics can come into play, specifically taking into account the impact of illusory superiority.

Illusory superiority is a cognitive bias I’m sure you’ve fallen prey to before: the “above-average” fallacy. In this case, a sense of “my kitchen is clean, but what about so-and-so’s?” leads to heightened fears about food poisoning from home kitchens. While permitting does convey important information without having to go and inspect every kitchen before you eat,  excess permitting reduces overall welfare when most people’s kitchens are quite sanitary. Digging deeper into this requires a more empirical approach. How many people gave themselves food poisoning, or how many people got food poisoning from a “bake sale” or “food fair”?

Increasing access to information can help make more informed decisions about the cottage food space, especially whether people want and benefit from further deregulation in the near future. For now, economists and foodies will have to be satisfied with waiting to see if some natural experiments present themselves across California.

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