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A blog about economics in the South Caucasus.

Consumer Rights in Georgia

On the 15th of March 1962, President John F. Kennedy delivered a seminal speech to the congress, outlining the four rights that he considered essential for consumers: the right to safety, the right to be informed, the right to choose, and the right to be heard. Ever since Kennedy’s speech, the idea of consumer protection blossomed both in theory and in practice. In this year, 52 years after Kennedy’s speech, Georgia will pass a new law on the protection of consumer rights. Let us have a look at consumer protection in general, in Georgia, and at the draft law that will enter the parliamentary process soon.


WHAT IS CONSUMER PROTECTION?

It is useful to distinguish two kinds of consumer rights, namely ex ante rights and ex post rights.

Ex ante consumer protection refers to the time before the purchase was made. It prevents potential buyers from being deceived, it ensures product standards, and it helps consumers to make the right decisions.

For example, there are plenty of safety regulations in place for potentially dangerous technical products like chainsaws, electric bread cutters, and water boilers. In Europe, fuses must be so sensitive that you can throw your hair-dryer into the bathtub while taking a bath without suffering an electric shock. Before the electricity reaches your body, the fuse must already have blown (we do not recommend to test whether this really works).

Other standards refer to the way in which goods are produced. For example, in Europe and the USA, the attribute “organic” is legally protected. Organic food needs to be produced under certain standards that restrict the use of pesticides, fertilizer etc. There are also laws that set standards for calling a product “beer”, “milk”, or “juice”. The latter must be made from fruits and water only (otherwise it can only be called “nectar”).

Also the list of ingredients of foodstuff may be useful for a buyer. It helps vegetarians to avoid meat and people who suffer from a peanut allergy to avoid an anaphylaxis. And the drastic warnings on cigarette packets, like “smoking kills”, “smoking causes cancer”, and even “smoking can cause erectile dysfunction”, may lead some smokers to abandon their unhealthy habit.

The most radical means of ex ante consumer protection is banning a product from being sold. For example, in some countries it is not allowed to sell leaded fuel and unpasteurized milk. And everywhere in the world it is forbidden to sell hard drugs.

Ex post consumer protection refers to the situation after the good was purchased. For example, there may be regulations that prescribe under which circumstances buyers can return goods to the sellers and get their money back. Also punitive measures against fraudulent or negligent sellers are considered to be part of ex post consumer protection. Such measures are particularly harsh in the USA. When in 1992 Stella Liebeck bought a cup of coffee for 49 cents in a McDonalds restaurant, the most lucky thing that happened to her was that she poured the coffee over her lap. This led to compensation payments (mainly “punitive damages”) of 2.86 million dollars to be paid by McDonalds to Ms. Liebeck (the case was later settled with a payment of several hundreds of thousands of dollars).


WHY CONSUMER PROTECTION?

In 2008, Chinese producers of baby milk wanted to pretend a high protein content of their product. To this end, the unscrupulous producers made use of the fact that the standard tests for protein content cannot distinguish between genuine protein and melamine, a chemical substance used as a fire retardant. So, they added melamine to the milk powder. This caused six babies to die, 54,000 babies had to be hospitalized, and 300,000 babies suffered from health problems. Some years before, watered-down baby milk led to the death of 13 babies due to malnutrition. The consequences were not only terrible for the affected babies and families, but it also damaged the reputation of Chinese food products.

Consumers often do not have the time and the expertise to make sure that they do not fall for a fraudulent seller. When entering an airplane, one just has to trust that the airline maintains the airplane in good shape and that the pilots are well-trained. It is a great service for passengers that government authorities shut down airlines that do not to live up to high safety standards.

On the other hand, consumer protection laws can also be problematic if they are pushed by existing producers as a means to prevent imports (so called “technical trade barriers”) or domestic competition. Moreover, they may impede innovation and they may be paternalistic for consumers.


THE NEW LAW IN GEORGIA

Currently, consumer protection can only be found in the “Code of Product Safety and Free Turnover” that was adopted in 2012, when the 1996 law on consumer protection was abolished. A new draft law that entails more comprehensive consumer protection is circulating in the ministries before it will be presented to the parliament. Let us look at some paragraphs of this draft law.

According to Article 6 of the copy of the draft law available to me, producers are required to provide information on how they calculated the price of the product. It says that the producer must provide “information on the total price of the product (including transportation, shipment, installation, etc.) or, where such price cannot be calculated in advance, on the components of the price and the methods of their calculation.”

From an economic point of view, forcing sellers to disclose their pricing is highly problematic. Pricing is one of the most closely guarded trade secrets, and this is fully legitimate. If a producer manages to utilize on a cost advantage, for example through a particular innovative production method or because of a cheap source of preliminary products, it would be a huge advantage for the competitors if this information would be revealed to them. As a consequence, incentives to improve the cost structure in innovative ways would largely disappear, as it would be much easier for competitors to copy those innovations if they know the cost structure of the innovator.

Even if domestic producers would abide by this regulation, it is not to be expected that foreign producers would disclose their cost structures because of a Georgian law. The Georgian market has the volume of a medium-sized city in Europe or the USA, and companies will rather lose this market than to disclose their pricing. While one may welcome some technical trade barriers in order to protect Georgian industry, impediments of imports of goods that are not produced in Georgia (like most high-tech stuff) can cause serious strain for the Georgian economy.

Article 6 also requires that general information about the product and the producer must be in Georgian language. While this is indeed an advantage for those Georgian consumers who do not speak Russian or English, it increases the costs of imports. One should also consider that if buyers of, say, computers would have a tangible desire for translated user manuals, sellers would have an incentive to do so without being forced by law. They could then charge higher prices for products with Georgian manuals.

Article 8 states: “The consumer shall have the right, except for special cases, to withdraw from the contract without giving reasons within 14 days after receiving the product”. This rule is clearly advantageous for consumers, but it will also increase prices. Sellers will anticipate that with some likelihood the product will come back within 14 days. If that happens, it may not always be possible to directly sell it again. Repackaging and testing of its functionality may be required. For sophisticated imported products that may be quite costly, as usually the product has to be sent back to the manufacturer for restoring its salability.

On the other hand, if one wants to have a “right of return” at all (which most countries have and which is arguably necessary to prevent customers from being cheated), then Article 8 is nice and parsimonious. In other countries, customers are incentivized to intentionally damage the product they want to return, because only then the law requires the seller to take it back. By not demanding the customer to give any reasons, there are no such futile incentives.

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Guest - Eric on Friday, 07 March 2014 20:53

Watch Milton Friedman debating consumer protection with the young and skinny version of Michael Moore http://www.youtube.com/watch?v=VdyKAIhLdNs. Moore's question was why doesn't the government require Ford to install an additional safety device in its cars to save human lives. Friedman's response is hilarious!

Watch Milton Friedman debating consumer protection with the young and skinny version of Michael Moore http://www.youtube.com/watch?v=VdyKAIhLdNs. Moore's question was why doesn't the government require Ford to install an additional safety device in its cars to save human lives. Friedman's response is hilarious!
Guest - Florian on Sunday, 09 March 2014 23:36

Very amusing video, but Friedman's reply is unconvincing. If Ford would have informed customers about the gas tank risk of the Ford Pinto and about the possibility to reduce this risk by paying an additional $13, many people would have decided to get the plastic block for $13. Indeed, although Friedman propagates maximal freedom of choice for consumers (and even called his book "Free to Choose"), in a market economy people are often not free to choose, because they are not informed. In this particular case, Ford should have offered two models of the Pinto, one safe and one unsafe ($13 cheaper), and let consumers decide.
The example brought up by the this skinny Michael Moore shows quite well that in a pure market system it is quite likely that consumers will fall victim to unscrupulous companies. And there are numerous such examples -- the Chinese baby milk scandal mentioned in the article is another one.

Very amusing video, but Friedman's reply is unconvincing. If Ford would have informed customers about the gas tank risk of the Ford Pinto and about the possibility to reduce this risk by paying an additional $13, many people would have decided to get the plastic block for $13. Indeed, although Friedman propagates maximal freedom of choice for consumers (and even called his book "Free to Choose"), in a market economy people are often not free to choose, because they are not informed. In this particular case, Ford should have offered two models of the Pinto, one safe and one unsafe ($13 cheaper), and let consumers decide. The example brought up by the this skinny Michael Moore shows quite well that in a pure market system it is quite likely that consumers will fall victim to unscrupulous companies. And there are numerous such examples -- the Chinese baby milk scandal mentioned in the article is another one.
Guest - Eric on Monday, 10 March 2014 01:49

I don't think Friedman would be against transparency. To be able to choose people should know what they are buying. But there is a great difference between a regulation that requires transparent labeling and a regulation that requires every company to install a particular piece of plastic. The latter would eliminate the less safe but cheaper option, as argued, quite effectively, by Friedman.

Why should Ford be offering both types of cars? People who want to pay for extra safety features can always go for a Volvo (which makes safety a key theme of its marketing campaign). It is a commercial decision for Ford whether it wants to compete with Volvo on safety features or rather focus on interior design, etc.

Finally, ex ante consumer protection beyond transparent labeling would be justified in cases involving externalities. For instance, ex ante regulations concerning the quality of headlights and breaks in a car would fall under this latter category. I wish these were regulated in Georgia (for old cars in particular).

I don't think Friedman would be against transparency. To be able to choose people should know what they are buying. But there is a great difference between a regulation that requires transparent labeling and a regulation that requires every company to install a particular piece of plastic. The latter would eliminate the less safe but cheaper option, as argued, quite effectively, by Friedman. Why should Ford be offering both types of cars? People who want to pay for extra safety features can always go for a Volvo (which makes safety a key theme of its marketing campaign). It is a commercial decision for Ford whether it wants to compete with Volvo on safety features or rather focus on interior design, etc. Finally, ex ante consumer protection beyond transparent labeling would be justified in cases involving externalities. For instance, ex ante regulations concerning the quality of headlights and breaks in a car would fall under this latter category. I wish these were regulated in Georgia (for old cars in particular).
Guest - Florian on Monday, 10 March 2014 02:19

Would Friedman agree that we need a regulation that forces companies to be transparent? Arguably, Friedman would insist that market forces alone will lead to the right level of transparency.

Is he right? Do market forces work well in creating transparency? The case of the Ford Pinto could be seen as evidence that they don't. The fact that there is Volvo, a company that makes safety its major selling point, does not help me if I have bought a Ford because I did not know that the company is risking my life for $13.

Would Friedman agree that we need a regulation that forces companies to be transparent? Arguably, Friedman would insist that market forces alone will lead to the right level of transparency. Is he right? Do market forces work well in creating transparency? The case of the Ford Pinto could be seen as evidence that they don't. The fact that there is Volvo, a company that makes safety its major selling point, does not help me if I have bought a Ford because I did not know that the company is risking my life for $13.
Guest - Eric on Monday, 10 March 2014 03:02

One can check Friedman's opinion on this. But, regardless, the market is very good at generating information that is demanded by consumers. For example, there is an unbelievable number of test drives, car reviews, gadget reviews, etc, that are currently available - absolutely free of charge - to anyone interested. Anyone interested in a critical review of a product does not go to the company websites but reads blogs and professional reviews. There are blogs about consumption items such as baby food, cosmetics, hotels, restaurants, pretty much anything... And all of that happens without any regulation because there is demand...

One can check Friedman's opinion on this. But, regardless, the market is very good at generating information that is demanded by consumers. For example, there is an unbelievable number of test drives, car reviews, gadget reviews, etc, that are currently available - absolutely free of charge - to anyone interested. Anyone interested in a critical review of a product does not go to the company websites but reads blogs and professional reviews. There are blogs about consumption items such as baby food, cosmetics, hotels, restaurants, pretty much anything... And all of that happens without any regulation because there is demand...
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