Fighting the fat

Denmark's 'Fat tax' has been repealed but doctors are pushing for a similar tax in the UK backed up with supporting measures.

For doctors in the UK the big problem is fizzy drinks, which are basically water and sugar. They want a tax which will arise prices by 20%.

Of course the PED of these drinks might be quite inelastic, but with so many potential substitutes, from juice to water, we might be pleasantly surprised by the effectiveness of such a tax. (However you can see the dentists getting ready to warn us against the effect of acid in fruit juice.)

The problem of fatty and high calorie foods is that they are 'imperfect information goods' and impose significant costs on the consumer and negative externalities on society who must treat their weight related diseases.

So using a price rise alone isn't enough. It is necessary to improve knowledge and directly intervene, such as banning advertising of unhealthy foods and closing take-aways near schools.

The problem of obesity is the 'new smoking'. The 1970's saw us begin to tackle the evils of smoking, but today the threat to peoples health from eating too much is just as serious.

It will take a broad range of measures to solve this. Some will cause a movement along the demand curve, but most will attempt to move the demand curve to the left.

The BBC report the proposals here

When regulation is necessary

Governments have tried everything to reduce smoking. 

They have used the best method available to such a market failure - tax and forced the price up to many times the actual cost of production. The problem is that this addictive good has very inelastic demand and so the effect on existing smokers is small.

Two primary methods of moving the demand curve to the left have been tried:

Education has failed. Everyone knows that smoking is bad for them, but they have failed to understand the full extent of the damage they do to themselves yet young smokers continue to take up the habit.

Banning advertising has not worked either.

However all these measures have reduced smoking and it is much less of a problem than it was in the 1960's when almost everyone smoked.

So what can governments do when they are faced with the failure of policy to correct this market failure? Unusually the best answer is more regulation. Normally the best solution to market failure is some sort of tradeable permit, then tax, but not with smoking.

The latest attempt is the banning of distinctive packaging. This has been introduced by Australia where all cigarette packets are now olive green with nasty pictures on them. The idea is to deny brand loyalty and make them unattractive.

Of course the tobacco companies claim its not going to work and even claim it is unfair. But these were the same companies who claimed smoking didn't cause cancer when they had evidence that it did, so lets not take too much notice of them.

The Telegraph report the new scheme here

Poor consumption decisions lead to poor health

Today there is news that in the UK deaths from liver disease has risen by 20%. Is this a surprise? Yes, because in the rest of Europe deaths from the same cause have fallen by 20%!

The cause of liver failure is usuall either drinking too much, being overweight or having a poor diet. Of course hepatitis, which is an infection, can also cause liver failure.

From our point of view this is another example of market failure. It is caused by consumers failing to take into account the full information available about the goods they consume.

There are three different failures identified here, but all have a similar cause. Lack of information, or demerit goods, are over-consumed compared to optimal levels.

In the case of alcohol there is already a high tax, but a minimum price per unit of alcohol will soon be considered by the government in an attempt to reduce binge drinking. As for poor diet and over-eating the question about how to tackle this remains unresolved.

What is certain is that more education will help in all three cases and stories like the one in The Guardian below needs to be taken seriously.

The Guardian story is here

Regulating demerit goods

Merit goods are technically 'lack of information goods', where consumers do not have all the information necessary to make a decision on consumption, or ignore information that is relevant.

Demerit goods, such as tobacco, are similarly lack of information goods. Where they are present in the market an inefficient allocation of resources will occur as consumers maximise perceived private benefits weighted against private costs.

They consume to the point where Marginal Private Benefit equals Marginal Private Cost. With demerit goods Marginal Private Cost understates the true costs of consumption and so the market fails.

One way to correct this is through price. A tax will raise private costs and reduce consumption. But what if the harm done by the good is so great that the optimal level of consumption is zero? Then regulation must be used to ban the good or service.

In Australia it has long been recognised that ultraviolet radiation causes skin cancer. It appears that sunbeds cause a much greater amount of harm than natural sunlight, but consumers do not consider the full information on harmful effects and continue to use sunbeds.  Therefore Australian governments are starting the process of banning sunbeds.

As with all policy choices there are costs of acting. There is no guarantee that it will work for a while as second hand sun beds are traded and who knows if there will be a trade in illegal sunbeds from states that do not act? Of course zero may not be the optimal level of consumption of sunbeds, for example some people suffer from a lack of vitamin D and need them to correct this. All regulation is a guess and can be a sledgehammer to crack a walnut.

The Age report on progress in Victoria to ban sunbeds here

When adjusting prices does not work

Markets do not always allocate resources efficiently. One such market failure is in the area of demerit goods such as tobacco.

Demerit goods are more accurately described as 'lack of information goods'. Consumers do not fully appreciate the costs and benefits of consumption and so the demand curve for the product is further to the right than it would be to achieve an efficient allocation of resources.

The usual response to this type of market failure is to tax the good. This raises the price and so reduces consumption. However sometimes this does not work to the extent desired. For example with tobacco consumers are addicted and the PED is very inelastic. Educating the population on the dangers is therefore another option and that can include graphic pictures of the harm that tobacco does.

One area of great concern is the diet of the nation. We eat too much overall and or diets include too much fat and salt. This is very concerning because of the health impacts which will shorten life expectancy and impose heavy costs on the NHS.

Taxing fat and salt is difficult, mainly because of the very many products involved. In addition any tax on food would be highly regressive as food takes up a higher proportion of the income of poor households. So far education has not been that effective. Therefore resorting to warning people at the point of sale and trying to get them to more fully consider the information about the product may help.

People know that fat is bad for them in too great a quantity (as are too may calories, salt etc). What they don't know is how much of each is in modern processed food. For some time there has been a call for a uniform method of labelling food to show the content. Each retailer and manufacturer disagreed on the format (some prefer traffic lights others % of daily maximums etc).

Now there is agreement on a uniform system that combines all of the approaches. The move has to be accompanied with education which allows people to understand the dangers of exceeding the recommended daily amounts. But if successful then the demand for high fat and salt goods will shift to the left.

Unfortunately this is only going to be a voluntary scheme so it falls short of 'Regulation'. It is, however, a good example of where adjusting prices is not enough and an example of an alternative policy to reduce market failure. But will it work?

The BBC covers the story here

Fat tax for Denmark - where next?

Denmark has just introduced a 'Fat Tax'. The aim is to raise the price of foods with a high saturated fat content.

The problem for markets is that they don't work properly when one side of the market does not have, or ignores, full information. A classic case is tobacco. Despite the known dangers of smoking people continue to smoke, imposing costs on themselves and others (negative externalities).

As with somoking a high fat diet imposes long term health problems on those who eat the food and costs on the rest of society as the cost of treating those health problems falls on the rest of the population through the NHS.

Traditional policies to tackle these 'lack of information' or 'demerit goods' include education, labeling of the products and, usually, tax. By raising the price of tobacco fewer people buy it. That's the law of demand. (Education and labeling shift the demand curve to the left, so the policies are complementary.)

Denmark has now taken the first step in introducing a tax on high fat goods. Any product with more than 2.5% saturated fat attracts the tax. How effective it will be remains to be seen. When tobacco was taxed at first demand was very inelastic (did not respond to the change in price very much) as people were addicted to smoking. Maybe there are more substitutes for high fat foods than there are to tobacco and so this will see a bigger response?

The Guardian reports the Danish tax here