In 2012, a California environmental group found that 14 plum and ginger candies imported from Asia contained 4 to 96 times the level of lead allowed under California law (Lee, Stephanie M., “Lead Found in Asian Candies,” San Francisco Chronicle, August 14, 2012). Some observers predicted that U.S. consumers would face significant price increases if U.S. law were changed to require thirdparty testing by manufacturers and sellers. Suppose instead that candies could be reliably labeled

“tested” or “untested,” and untested candy sold at a discount. Would consumers buy cheaper, untested goods or would they fear a moral hazard problem?

Discuss.

2. Production Efficiency