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Denmark's 'Fat tax' has been repealed but doctors are pushing for a similar tax in the UK backed up with supporting measures.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

Practicalities defeat 'Fat tax'

Denmark introduced the worlds first 'Fat Tax' just over a year ago. It was covered in this blog and got one of the highest number of hits of any post to date.

Now Denmark is scrapping the tax. They say its because it has cost jobs, caused people to go into Germany to shop and inflated prices.

Well taxes do raise price! That's the point. This is a disappointing move as it represents a victory political expediency over economic policy.

It would be nice to find out how much the tax changed behaviour, especially in areas a long way from the German border.

If there is an important lesson to learn it is that a country acting alone can disadvantage itself. This has often be said of acting on carbon emissions and pollution. If you impose higher costs on domestic firms in a market with few barriers to international movement then the result maybe that firms move. So perhaps the answer is a European Fat Tax; good luck convincing David Cameron on that one.

The Daily Mail report the story here

Missing the point on Carbon Trading

 Reducing the supply of permits will raise the price and maintain the incentive to cut emissions further

Australians have little grasp of the concept or problems of Carbon emissions and the need to correct this market failure. In the EU the need to reduce CO2 emissions is accepted and is being tackled.

The Age, the Australian daily paper, has got hold of the story that the carbon price in the EU emissions trading scheme has fallen and have interpreted this as a sign that the scheme is somehow failing. It represents the deep misunderstanding of how these schemes work which is prevelant in Australia.

The report that prices have fallen while volumes traded are up 26% in 2012 shows the success of the scheme! It means that firms are reducing carbon emissions and therefore can sell their surplus permits. That is a key incentive provided by carbon trading, those who can reduce CO2 emissions are rewarded by the revenue of the permit sales.

What is required is for the EU to now withdraw, or buy up, surplus permits so that the trading price rises again. The ETS market will then provide a further incentive for firms to cut emissions even more. Here the EU is too slow to act, but this is because it tends to work in 'phases'. It would be better if the EU intervened more actively in the market to stabalize the price of permits both to maintain incentives and provide certainty for firms who need to buy or sell them.

The Age report is 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

The effectiveness of taxing externalities

Australia introduced a carbon tax of $23 a tonne on July 1st. The aim was to help Australia reduce carbon emissions and meet its 5% reduction target by 2020 (UK target is 50% by 2020 and  80% by 2050 - just saying).

The point of a tax is to raise the price and reduce consumption. By getting people to change the pattern of their expenditure toward the relatively cheaper, lower carbon, goods and services Australian carbon emissions will fall.

By far the biggest contributor to Australian carbon emissions is electricity generation. Australia uses a lot of very dirty coal (especially in Victoria) which has been likened to environmental terrorism. The first data available shows us that there has been a significant change in the use of electricity.

One reason is that there has been quite a take up in solar showers. This reduces an important fraction of daily electricity use, as long as the weather is reasonable of course. So less electricity needs to be generated.

The other effect in the market is the move away from coal by the generators. This is exactly why the carbon tax was introduced.

The Age gives details of the change in power generation.

Incomplete analysis can lead to errors

In a time when the Department for Transport have admitted their analysis of Rail Franchise bids is flawed we are reminded that a faulty method can lead to poor decisions.

One of the most difficult decisions to be made is what transport infrastructure to invest in. There are very many factors to consider, such as forecasts of future demand and external costs and benefits. All of these are difficult to value.

The solution is a full Cost-Benefit Analysis that considers all the private and external costs and values them properly. Only then can a judgement be made and even so substantial margins of error must be considered.

So should we give much credibility to a study by MIT that a third runway at Heathrow is a bad idea?

The MIT study says that, compared to a new Thames Estuary airport (Boris Island), a third runway at Heathrow would cause more early deaths due to pollution. So that's it then, decision made.

However when questioned the authors admitted they had not included any of the following issues in their study:

* The cost of construction at either site
* The impact on local transport at either site
* The impact of extra road traffic too and from any new airport
* The external costs and benefits of either airport

Of course their defence was that they were only looking at health impacts of the two options and that is actually quite reasonable. It represents a contribution to the full cost-benefit analysis and a valuable one at that.

The Guardian reports the study here

Pricing carbon causes a change in behaviour

Australia has ever so reluctantly introduced a carbon tax that will take effect from Sunday. Many there question the need to even take action, while in the EU we have been trying to make a difference since the early 1990's.

It is interesting to see the effect of a 'first move' in a tax regime. Taxes rely on changing prices to affect consumer and firms behaviour. If the price goes up then the nature of demand says that less will be bought.

Therefore the Australian carbon tax charges large firms for the carbon they use (Carbon dioxide emitted really) and they must recover this cost by raising prices.

How much prices go up and how much less of the high carbon goods are consumed is the interesting question. Economists have a way of estimating this, its called 'elasticity of demand' but it is not easy to tell exactly.

The Age reports that many firms have now prepared 'carbon-reduction plans' to avoid the Australian carbon tax. That is exactly the response they wanted - a case where tax avoidence is to be applauded.

The Age reports the story here

Scotland's 50p per unit minimum alcohol price

Alcohol is an imperfect information good. Those who consume it don't take fully into consideration the complete costs of drinking it on themselves, or on others. There are clear negative externalities, such as the cost to the NHS of treating alcohol related disease. Drinkers also overestimate the private benefits to themselves.

Overall then the market consumes more alcohol than is optimal.

Scotland has decided that they will impose a minimum of 50p per unit of alcohol to try to address the problem of people abusing alcohol. This means that a drink that contains two units of alcohol (say a pint of lager) cannot be sold for less than £1. Of course there is no effect if the price is already over a pound.

The effect of this minimum price therefore depends on the current price. Setting a minimum price below the market equilibrium has no effect at all, while setting a price above equilibrium will reduce demand. Of course it can also raise the willingness to supply!

The aim of this policy is to overcome the 'cheap alcohol' available in supermarkets (such as ownbrands) and 'happy hours'. These promote heavier drinking and, as some people know, this is habit forming!

The real question is will it be effective? Alcohol is already heavily taxed, restricted by age limits and only available from licenced premises. There is also a concerted effort to educate people about the true effects of drinking (although this is far less than the effort made on smoking). So far these have failed to eliminate the problem.

The PED of alcohol is likely to be inelastic. Therefore the effect on current drinkers will be small, but maybe it will stop some people from starting to drink. Therefore the pay-off will come in the long-term. What is clear is that dealing with imperfect information goods needs a set of complementary measures which reinforce each other.

The Guardian has details here

Petrol prices - is the duty holding back the economy?

Today a group of motoring lobby groups will appeal for a reduction in the duty on fuel. Britain has a relatively high duty on fuel and this has often caused motorists to complain.

The attached article, from The Daily Mail, tries to make the case as only the Mail can. Poor oppressed motorists and consumers are unfairly put upon by a cruel government.

The petitioners to the Minister will also suggest that lower fuel duty will allow the economy to recover as people are prepared to take to the roads again and goods will be transported more cheaply.

There are several points of economics.

1. While demand for fuel has fallen as prices have risen (by 19% in two years) the elasticity of demand is still inelastic. This is because there are few substitutes and its necessary for most people to get to work, the shops and pursue a normal life. Goods also have to be moved to customers.

2. While the tax on fuel is high it is there to help cover the external costs of travel. This includes carbon and other emissions and congestion. These negative externalities are significant and while difficult to measure most economists consider the fuel duty does not yet cover them.

3. The supposed macroeconomic boost of a cut in fuel duty is unlikely to make much difference to overall AD, but a cut in VAT would be more effective. Whether businesses will welcome the expense of changing VAT rates twice more is less clear.

Enjoy this rare link to one of the less credible newspapers, but beware their biased and rabble rousing views.

The Mail article is here

The problem of externalities in motoring

One of the facts of transport  is that cars cause negative externalities. Specifically congestion and carbon (and other) emissions.

One solution is to reduce the negative externalities by subsidising alternatives that create fewer problems. This principle has now been applied to electric vans. The government are to subsidise up to £8000 of the cost of an electric hybrid vehicle. This will result in a reduction in carbon fuel use and so less pollution.

The subsidy, which can cover 20% of the price of the van, is badly needed. A Ford Transit van costs £18000 in the diesel version, but £32000 in the electric version. This is a major obstacle to sales despite the lower running costs of the electric vans.

So with such a hefty subsidy there is there bound to be a big take up? Sadly not. A similar scheme was announced for cars. Under  that scheme 1,052 cars were sold in 2011, using up just £5.26m of the original £250m budget.

The problem is that the  demand for these cars and vans is highly inelastic. A very large price reduction is required to promote a significant rise in demand. You should consider what the factors are that determine that inelastic response.

One of the things we have learnt in transport policy is that complementary measures are needed to provide support for policies that aim at changing the mode of transport. This policy is just one of the many such policies.

The BBC cover the story here

Carbon emissions and national income

Many variables move with national income (some in the opposite direction of course). One of them is carbon emissions.

During the recession industrial production fell and households took fewer holidays. Carbon emissions fell and our progress towards the carbon reduction targets looked good. Now it appears that the recovery is reversing the trend and carbon emissions are rising.

In a week where 100 idiot Conservative backbenchers called for the cutting of subsidies for renewable energy it is important to remember why these industries need help.

Carbon emissions are a market failure. The market does not price emissions as there is no charge for putting them into the atmosphere and so firms don't consider the cost of those emissions. The result is that more carbon is dumped in the atmosphere than is optimal.

There is a way to stop this. We tax firms on their carbon emissions or issue tradeable permits. This isn't always popular and does not do enough in a highly inelastic market to reduce demand. So directly subsidising renewable energy, which cannot compete on price with coal, oil or gas will allow low carbon energy production.

It is a case of attacking the problem from two directions. Another way, as an article linked to the one below points out, is to insulate homes properly. A staggering 10 million homes have no or inadequate loft insulation and almost as many don't have cavity wall insulation. Subsidising insulation (and it is already) can shift the demand for energy to the left and will help in a third way.

The Guardian article is 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