Giuseppe Rohr and Eva BjörkBjörgvinsdottir October 13, 2011
Policy Evaluation and Critique #1
The fat tax
Over the last couple of decades a large increase in obesity rates has occurred. Obesity represents a major concern in public health especially in developed countries. In the U.S. 34 percent of the population suffer from obesity (which means that their BMI is more than 30) and if the trends don’t reverse 86 percent of Americans will be overweight or obese by 2030.[1]The question is whether the obesity epidemic is a concern the government should take care of or if the government should let people be responsible for their own health. And if they intervene – how can it be done with an efficient outcome?
Denmark has recently implemented a tax on foods with a saturated fat content of greater than 2.3%. The purpose of this tax is not specifically to fight obesity, but would it be possible to apply this tax to the U.S. which has a much larger obesity problem than Denmark?
We would like to explore which motives the government has for intervening in this way. Obesity has enormous externalities. It can be thought of as a negative consumption externality because of the enormous negative health effects which have high medical costs. Recent estimates suggest that the medical costs in the U.S. may be $117 billion per year and if the development doesn’t change one out of every six dollars in health care will be used for treatments directly related to overweight and obesity.[2] However the bill for the obesity problem is not only going to be paid by obese individuals – it’s a cost for society as a whole. People who are not obese have to pay the same cost as obese people and as a consequence they are worse off.
There are a lot of health problems associated with obesity such as heart disease, diabetes and some types of cancers. A consequence of these health impacts is lost productivity at work because of more illness. Lost productivity costs society a lot both in lost private earnings and thereby smaller tax income, but also in the productivity of firms which affects theiroutput.
Another perspective is the fact that fewer deaths and diseases will improve the life quality of people, which should be an incentive for the government to intervene in the obesity development in the U.S. When people eat healthier they are also more productive and society benefits from the higher productivity.
There are a lot of benefits from eating healthier, but should government intervene and how should they do it? Is a tax on fat really the solution? Aren’t people mature enough to decide for themselves what they eat? If we lived in a society where citizens were aware of all existing information on the effects on your health of eating fat food, taxation wouldn’t be necessary. However in practice the situation is often such that people in many cases don’t have near complete information and they might underestimate the health effects, since these occur in the long term. With the fat tax people are still free to consume whatever they want, but now they just have to pay a more reasonable cost to society. Additionally healthier food will improve the quality of life.
The effect of the negative consumption externalities of fat foodon the quantity produced can be seen in the figure below. The figure shows the supply (the PMC curve) and demand curve (the PMB curve). The private equilibrium is where these two curves intersect, but if we look at the social equilibrium it will be affected by the negative externality. SMC will equal PMC (as there are no externalities associated with the production of foods with high saturated fat) and the SMB curve will be below the PMB curve (because we have to take into account the marginal damage done to others by eating foods with a high saturated fat content). The social-welfare-maximizing level of consumption is the point where SMB equals SMC. At this level of consumption there is an overproduction of fat foodby . Between and the social costs exceed social benefits and there is a deadweight loss.
Implementing a fat tax might make some companies make alternative products with a reduced content of fat to avoid losing customers. A lot of junk food has a large amount of fat in it which can easily be reduced without changing the tastenotably.
How the tax on foods with a saturated fat content of greater than 2.3% will impact the consumption pattern of consumers mainly depends on the value of the own price elasticity E=, which is the elasticity of demand with respect to the good’s own price.
If the absolute own price elasticity, |E|, is high, a given variation inthe price of a good will result in a bigger change in quantity demanded. If |E| is little, the change in quantity as a result of a given variation in theprice will be small.
It is reasonable to think that the own price elasticity of fat food for US consumers is lowwhen we consider their food habits. Therefore, a big change in the price of the good is needed in order to obtain a certain decrease in the quantity, Q, demanded.
The graph below shows the effects on prices and consumption of implementing a tax on saturated fat. The higher the own price elasticity the greater the deadweight loss will be as a result of the tax.
The deadweight loss can be seen as the cost society has to bear in order to achieve a lower consumption of fat food.Compared to the high indirect costs derived from consuming fat food, this deadweight loss would be a bearable cost.
When the price of fat food increases it affects the relative price of fat and healthy food such that the healthier food will become relatively cheaper. This makes the healthier food more attractive when a consumer is choosing between the two types of goods. The choice depends on each consumer’s budget constraint and indifference curves. As can be seen on the graph the higher price on fat food forces the consumer to go on a new indifference curve as the new budget constraint (the green curve) is lower than the old one (blue curve).
Other possible interventions
The government faces a major challenge trying to reduce the increasing obesity in the U.S. and one way to do this is to try and make people consume less fat food through implementing a tax on saturated fat. However this is not the only option. We’ll go through different other interventions that the government might consider and compare them to the implementation of a fat tax.
Subsidizing healthy food could be an alternative solution. It would have two main effects: a general increase in healthy food consumption, as the supply curve shifts to the right; relative prices of fat and healthy food would change the latter now being more affordable. Therefore, it is even more likely that people will tend to consume more healthy food than fat food.
Another option would be to subsidize sports activities. This could help improve US consumers’ lifestyle.
However subsidizing has a problem: as well as a tax, it implies a deadweight loss.
Subsidies could be implemented alone, and would be a government expenditure, or simultaneously with a tax on fat food. This second option implies that, on one hand, the subsidy is financed, at least partially, with the tax; on the other hand, there will be another deadweight loss.
Subsidies implemented alone have the goal of improving the US consumers’ habits and, consequentially, reducing externalities of fat food in the long run.
Implementing the fat tax would allow to reach the goal faster, because the government would make the relative price of healthy food compared to unhealthy food much smaller.
Another way for the government to reduce obesity is to focus on the younger generation and prevent obesity from the very beginning by better education about the effects of unhealthy and fat food. Healthy school meals will also help prevent young children from becoming obese. This way of reducing obesity from an early state compared to implementing a fat tax is a much more expensive strategy for the government. However it would be an investment for future generations and probably have a greater effect. The effect of a fat tax is a short term effect while better education on health is a long term effect which makes it difficult to compare the two strategies.
Many basic groceries have a content of saturated fat higher than 2.3%. Is it fair that mother’s with newborn babies who have to feed their children with infant formula (which has a high content of saturated fat) are forced to pay more. A tax that only affects “unnecessary” goods like chips, chocolate and other types of candy or junk food could be another option. In this way only goods that actually bear a great part of the increasing obesity will be affected. The analysis from above will to a large extend be the same as for the fat tax, but it is going to hit one of the main sources of severe overweight. In addition, the firms that produce these types of goods might expand their production of alternative and healthier goods. An example is the Danish chip manufacturer, KIMS who produces their chips using sunflower oil which has reduced the content of saturated fat. A tax on “unnecessary” goodswill force the producers of these goods to be more innovative and thereby give their consumers healthier alternatives.
Conclusion
A tax on the saturated fat content of foods is a way for the US to reduce the big problem with obesity. However it’s a short term solution. It’s necessary also to consider implementing long term solutions.
We would recommend that the US implements a tax only on “unnecessary” fat food as this is the primary reason for the large obesity. In addition to this tax long term implementations are also necessary. More education in primary schools on the effects of unhealthy food and establishing a healthy lifestyle from the beginning through healthier school food and more physical activities is a way for the US to prevent future obesity. Subsidizing healthy food and exercise would be another leverage.
It is of great importance that the US starts doing something so the trend of recent years stops and helps the obesity rate to go down. One thing does not exclude the other and having a short and long term strategy for making consumers eat healthier is necessary.
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