The Dilemma That Comes With a Warning Label

Every Ferrero Kinder Surprise egg includes a toy and a warning label.

Together, they create a supply and demand dilemma.

Ferrero’s Warning Labels

Since 1974, the Italian candy company Ferrero has sold a chocolate egg that contains a small toy. Reflecting an Easter tradition, it is supposed to be a collectible treat for little children. However, because the toys are tiny, they could (and did) kill a child. As a result, the package includes a warning label in 34 versions.

If you bought a Kinder Surprise Egg (but not in the U.S. where is is banned), you would see (but probably not read) this safety label in 34 versions:

“Warning, read and keep. Toy not suitable for children under three years. Small parts might be swallowed or inhaled.”

The 34 versions:

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The format:

Our Bottom Line: The Supply and Demand Dilemma

Warning labels target two sides of the market.

On the demand side, the goal is dual. Yes, they feel a responsibility to encourage safety. However, they certainly do not want to decrease demand and shift the demand curve to the left. Consequently, the warning is tough to read. It encourages us to ignore it.

In a list of demand determinants, utility is a consideration. Firms don’t want to diminish the utility of their product:

Meanwhile, on the supply side, businesses have to consider the cost of production in two ways. Most obviously, they want to avoid liability if anyone is harmed. However, avoiding the cost of a lawsuit also has a cost. For Ferrero, they have the expense of a warning in 34 different versions. A determinant of supply, the cost of production determines the position of a supply curve and whether its position will change.

Below I’ve drawn the decrease in supply that could result from a warning label. (I know it looks like an increase because the second curve is above the first. However, since the quantities are less, it is a decrease):

You can see that there is a lot more to a warning label than safety. Firms need to deal with supply and demand dilemmas.

My sources and more: Thanks to the always interesting podcast The Allusionist for alerting me to label warnings. (All of my images are from The Allusionist.)

Originally published at https://econlife.com on March 21, 2022.