Should the government tax goods that are unhealthy
In recent decades the rate of obesity across the world has risen. As of 2014, 13% of
the world’s population is obese caused by the overconsumption of unhealthy
goods. Obesity is estimated to cost the UK over £6 billion/year in direct healthcare
costs (1). Furthermore smoking costs the United States $600 billion each year(2).
Unhealthy goods not only burden health services unnecessarily but also decrease
productivity and quality of life.
Goods found to be detrimental to health are demerit goods and have negative
consumption externalities. They are demerit goods as consumers in the market for
unhealthy goods do not have complete or accurate information to the negative
consequences associated with the good. Unhealthy goods have negative
consumption externalities as when they are consumed third parties like the NHS
have costs imposed on them due to the resulting increased disease/obesity.
One way to correct this is with a per unit tax on the market for goods deemed to
be unhealthy.
The demand and supply graph shows the market for
goods that the government deems unhealthy. The curve
D optimal shows the demand if all consumers had
perfect information about the consequences of
unhealthy food. The curve D real shows the demand
curve currently present. This highlights the root cause
of this market failure as unhealthy foods are demerit
goods. The supply curve S1 shifts to S2 after the per
unit tax. This causes a shift in the equilibrium point
from Q1,P1 to Q2,P2. This equilibrium point is at a
higher price point but its quantity is closer to the
optimal social consumption. This reduces the market
failure and increases quality of life for the consumers
in the market.
However, the success of this intervention is dependant on many factors, one factor
being that if the price elasticity of demand is inelastic the per unit tax will have to
be larger to produce a similar effect.
The graph also shows the tax incidence of the per unit tax with the pink area being
equal to revenue paid by consumer possibly and the yellow area being equal to
revenue paid by the producer. The proportion of these depend on the price
elasticity of the demand curve with more being paid by the consumer if the
demand is inelastic.
For some goods in the market that are addictive or are consumed habitually like
cigarettes there is always a chance that consumers keep consuming at high levels
and pay the per unit tax leading to a significantly higher price level and increase in
inflation. For example, in Denmark a tax was levied on foods containing more than
2.3% saturated fat in 2011. This tax was however heavily criticised and was
abolished after a year as it led to inflated food prices.
Per unit taxes are also always regressive meaning that consumers with lower
income pay a larger proportion of their income towards the tax which is
inequitable and contributes to the inequitable distribution of income.
This tax has also led to some unintended consequences like the reformulation of
drinks to contain substances which are not as well studied to be substituted in the
place of the substance deemed unhealthy.
This has occurred in the UK soft drinks market as a result of the sugar tax with
glycerol being the substitute. This unintended consequence is an example of
government failure due to the law of unintended consequences. Governments are
also prone to information failure and goods may be deemed unhealthy incorrectly.
Any policy would have to be well studied as consequences related to substitutes
and complements would likely be unforeseen and could negate any health
improvements
References:
(1) McKinsey Global Institute (2014) Overcoming Obesity: An Initial Economic
Analysis.
(2) Costs and Expenditures (cdc.gov)