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When are Voluntary Labels Preferred to Mandatory Labels?

In a previous post, I argued that one of the key factors determining the ultimate effects of Prop 37 in California will be how retailers respond.  Will they choose to label all products "may contain GE ingredients" or will they switch to non-GE and not label?

Pro-Prop 37 folks argue that companies will simply add a label and the thus the costs of Prop 37 will be trivial (the costs mainly being the addition of a few words on a package).  Some economists argue the opposite, and suggest that the ultimate costs of Prop 37 will be very large because food prices will drastically increase due to retailers and processors switching to non-GE ingredients.  

I recently exchanged emails with the author of the above mentioned report arguing labeling costs will be trivial.  I asked why they thought firms will simply add "may contain GE" labels.  The answer, in short, was that we shouldn't expect the costlier European outcome (i.e., all products are non-GE and there are no labels) because Americans are less concerned about biotechnology than Europeans.  

I happen to agree with this assessment.  But, I thought it was a curious response coming from a proponent of mandatory labeling.  The economic research suggests that when demand for for non-GE products (as expressed by market behavior)  is relatively low (as it seems is the case in the US given the size of the organic and non-GE market) voluntary labels are preferred to the mandatory labels that would be required by Prop 37.  

Here is a summary of the economic research on the topic in a book chapter by Marks, Kalaitzandonakes, and Vickner (2004; pg., 36):

Protecting consumer’s ‘right to know’ and the ‘right to choose’ is advanced as the main reason for the current European policy stance.  In principle, there can be little objection to the argument that consumers should be able to exercise such rights.  Market transparency is the linchpin of well-functioning markets.  However, mandatory labeling is not the only option that would allow consumers a choice.  Indeed, given that mandatory labeling systems are costly to implement (Kalaitzandonakes et al., 2001) costs and benefits with such labeling regimes must be carefully weighted in order to decide their optimality (Giannakas and Fulton, 2002).  In this context, the proportion of consumers that would effectively discriminate between GM and conventional foods in the market place is a key parameter (Giannakas and Fulton, 2002).  Indeed, Caswell (1988, 2000) and Giannakas and Fulton (2002) have argued that a volunatary labeling programme may better serve a country where only a minority of the population is interested in separating GM from non-GM foods.