Sriracha Shortage? Not Quite Yet

For about a day, food-lovers everywhere were upset at the prospect of a Sriracha shortage when a lawsuit was brought against Huy Fong Foods, Inc. One of their plants in southern California was creating a chili odor in the air that was so strong that it was said to be a public nuisance, causing "burning eyes, irritated throats, and headaches." Luckily, a judge denied the town’s attempt to get the plant to cease production until they can reduce the odor. This article on the recent development of the suit says, “Huy Fong executives said they were cooperating with the city to reduce the smell, but balked at the city's suggestion of putting in a new, $600,000 filtration system that may not be necessary. The company said it was looking into other alternatives when the city sued”.

This odor is an example of a negative externality of production. It is reducing the well being of others who are not being compensated by the firm. In this case, the town of Irwinsville attempted to implement a solution to the externality similar to the example of the confectioner that we looked at in lecture. The producer is liable, but the marginal benefit of production is greater than the marginal cost of production, therefore the output is still produced. This still requires negotiations in order to reach a solution. As Huy Fong agrees, jumping to the solution of spending $600,000 on a new filtration system might lead to a lower level of odor but that does not mean it is the optimal solution. In order to internalize the externality, government action might be necessary. A corrective tax seems like a reasonable solution to this externality; Huy Foods would pay the tax, which would be an input cost, raising their MC of production (PMC curve shifts up) and reaching the socially optimal level.