Smelly Hot Sauce? The Risk of Externalities

Judge Rober O’Brien recently ruled that a sriracha factory cease any activities that release odors which he called “extremely annoying, irritating and offensive to the senses.” The factory is located in Irwindale, a suburb of Los Angeles. The city sued Huy Fong Foods on October 21st, following reports of respiratory ailments resulting from odors released by the factory. The factory goes through approximately 100 million pounds of chilies annually.

David Tran, the founder of the company, said that “If the city shuts us down, the price of sriracha will jump a lot.” Nevertheless, he remained adamant that the recipe must remain unchanged, saying that the peppers are what make the sauce unique. In 2012 the firm made $85 million.

This case is another example of the uncertainty faced by firms when opening a business. Going into the hot sauce industry, it seems difficult to imagine Mr. Tran could have expected the city to sue over “offensive” odor. As in other cases, government intervention has seriously threatened the operations of Huy Fong Foods. From an Industrial Organizations standpoint, this is a classic case of uncertainty, which all firms experience to some degree when first opening. However, given the negative externality present, the judge’s ruling is an important example of how government can sometimes force the costs of externalities off of local and on to producers.

http://www.bbc.co.uk/news/world-us-canada-25126194

3 thoughts on “Smelly Hot Sauce? The Risk of Externalities

  1. Is the city suing because of annoying smells or health concerns (respiratory concerns)? I know that a local Anheuser-Busch plant near where I live gives off a distinct smell, but to my knowledge no one has sued them. They actually at one point provided well paying jobs for that community.

  2. I also thought of my local Anheuser-Busch production plant. To some degree, pollution is a necessity. Companies and factories can pollute, but the benefits (employment) will be outweighed by the costs (smog, etc.) as the city relies less on the company for employment.

  3. This is interesting in terms of timing. Huy Fong Foods will have trouble dishing out its normal levels of sriracha with the new impediments on the plant. Subway has just launched an entire advertisement campaign celebrating the fact that it now offers sriracha. Assuming the advertisement campaign boosts demand for sriracha, will Huy Fong foods be able to adjust their supply?

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