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.