Animal welfare, moral consumers and the optimal regulation of animal food production

This paper identifies market failure caused by an animal welfare externality that occurs if private animal friendliness falls short of social animal friendliness. Efficiency is restored by taxing the quantity of animal food and subsidizing the quality per unit of animal food. With consumer and producer heterogeneity, a promising policy includes mandatory quality standards. If a producer wants to be qualified as outdoor husbandry farmer, she has to fulfill an ambitious standard. As compensation, she obtains a subsidy on output, whereas factory farmers, who face a lower mandatory quality standard, still have to pay a tax on their output.