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?
I think that taxing fatty food would be a good idea. As said in the sotry above, there is information failure and even though there are guidelines on how much we should eat, and there are constant reminders and labels on food packaging, people are still eating. So.. the next step should be to tax, this increases the production costs and therefore the price of the good, so should reduce the quantity of demand. At this difficult time of recession, it should work even better, as mentioned in a previous article, McDonalds is an inferior good, due to its low relative prices, people buy more of it than cook a meal. However buy increasing the price of fatty foods, their prices become more expensive relative to healthy foods, so consumers will have to decide between healthy or fatty and with price not being a factor, so who wouldn't choose healthy?
ReplyDeleteThe products people buy in supermarkets do already haver the charts displaying the varying quantities of salt fat etc on them and they are all easy enough to understand. I personally don't see how a uniform approach to them will actually help at all, the only differences are that some are colourful and some are in circles rather than in tables. The information is all the same regardless. But clearly the introduction of all this information has had little difference overall to the sales of the unhealthy products. It could be argued that these unhealthy foods have inelastic PED coefficients due to people's dependence on them when they are in a hurry or if there are no cheap enough substitutes available.
ReplyDeleteAnd Lo behold, we get onto the idea of a tax. Tax unhealthy foods and people will still buy them, the inelastic demand curve strikes back with people still purchasing the unhealthy food. However, any tax receipts the government gains from this tax could be used wisely to help subsidise food companies that are creating healthy products. For example, there are a number of small start up companies that are trying to sell healthy fast food and drinks, subsiding these companies could lead to them expanding and selling more healthy goods to a greater proportion of the population for cheaper amounts. These firms will then be able to compete with other firms in the market as currently there are quite strong barriers to entry for a new fast food company. But if new healthy food firms can compete then it may result in the existing firms changing tack and improving their standards.
Even a subsidy on fruit and vegetables sold in the UK would probably have positive effects on everyone else.
If there is an education failure then it cannot be solved by educating the children at schools about eating healthily, yes it will have benefits but it will not solve the problem. This is because it is not children (usually) that do the weekly shopping and all the cooking at home, they aren't in control therefore to change their home diets or change their lifestyles to be more healthy. Thus the issue has be raised with those that are in the position to change those things, however I see no practical way of educating those of that age group as their time will be spent on their careers and their families after that.
Telling people they shouldn't do something because it is unhealthy has historically not been very effective especially in the areas of drugs (such as alcohol and tobacco) this is down to three main reasons: They are enjoyable (addictive), they trend with age groups and the effects seem to far removed from your immediate experience (unless someone close to you is fatally/badly effected. The enjoyability (even addictiveness) and the problem with being too far removed from the health effects applies to unhealthy food as well. People are unlikely to stop without serious reason. The problem however with unhealthy food is it is cheaper and often much easier so taxing it will greatly affect poorer households.
ReplyDeleteA possible solution I can see to this would be to tax chains and establishments. To explain this further we can look at the big Mc D's, everyone enjoys a meal at this classy establishment every now and again and this is ok however it is seeing this as the easy option for a meal (particularly for kids) that makes it so unhealthy and bad. The first part of my solution would be to limit location, either to tax the fast food establishment greatly for locating itself in a highstreet or even disallowing it. By this I mean forcing these shops out of highstreets and only allowing them to be located in entertainment areas like shopping centres, cinemas, or other such areas. This idea is difficult as it massively restricts the chains but creates the idea more so that they are as treats or only for special occasions. This solution is not very well presented however I think the idea of it is clear. Another option is disallow advertising like with alcohol restraints and tobacco. Along side this forcing the chains to pay large taxes which would force their prices up and push people away, despite this affecting poorer households there are other options as cheap in supermarkets which despite not being the healthiest of meals are much healthier and pushing people away from fast food chains and towards choosing their food in shops can only be a good thing as long as their is open and obvious advice towards healthier but still affordable options which are there. But it's just too easy to sell rubbish. There needs not to be a push in the right direction but a complete change of course and approach to the whole subject of healthier eating.
Taxing fatty foods would encourage people to look at the alternatives before they buy the product. It will also mean that the money made from the tax can be used to subsidise farmers or establishments that are serving up healthy foods. This subsidy will help to bring the price of healthy foods down and thus this price decrease will cause an increase in the appeal of eating healthily to the people that eat fatty foods due to their financial situation.If the tax does decrease fast food consumption then money will be saved on the NHS and this money can be used in better places e.g. cancer treatment. However does everyone who eats fatty foods on a regular basis do so for a financial reason? And would this tax discourage them from continuing to eat unhealthily? This is open to debate but personally I think other areas such as advertising should be resrticted in order to try and reduce obesity rate in this country.
ReplyDeleteDavid Harrison-Fisher
Taxing fatty foods is a bad idea with very good intentions. Firstly, many of the people who consume fatty foods tend to be families on very low incomes and with living standards rising they are trying to find the cheapest food for their children. A 'fatty food tax' would hit their pockets hard and they might have to pay a lot more for food. It would be a tax on the poor. Secondly, if this 'fatty food tax' is an indirect tax (which it presumably will be) then it could increase inflation due to its effect on prices. Also, we need more consumer confidence in the economy and a new fatty food tax would if anything hinder confidence rather than help it. The Government could use 'food vouchers' or smart cards as well as better labelling encourage people to eat healthily.
ReplyDeleteObesity imposes costs on both the individual and on the rest of society. These costs include medical costs for treating obesity and its resultant illnesses, lost working days and so on. Since people do not consider these costs when making their diet and exercise decisions, obesity rates will tend to be higher than those that would occur if these costs were taken into account. A fat tax would affect people’s decision-making in order to bring the outcome closer to the socially desirable one. Revenue from a fat tax could be used in various ways, such as financing subsidies for healthy foods or exercise equipment, funding advertising campaigns for healthy eating or in schools. A general increase in a country's health could have a considerable effect on their economy’s productivity. I think the traffic light system is far too simplistic to make up for the information failure as it only states generally what is good and what is bad but there so many other factors that could make things good for one person and bad for another. All that is required is clearer labelling on food so people can make the conscious decision to buy it or not.
ReplyDeleteKimberley Okonta
I know this is an old article to be commenting on now but today I found an article on the economist that reminded me of this blog entry. In case anyone has a copy of the 17th-23rd November 2012 Economist, the article ‘A fat chance’ is on page 42. It can also be found here: http://www.economist.com/news/europe/21566664-danish-government-rescinds-its-unwieldy-fat-tax-fat-chance .
ReplyDeleteIt talks about what happened in the Danish economy when the government imposed a tax on saturated fats. This demonstrates exactly what was said in the blog about it being difficult to tax fatty foods as many products are involved. There was another problem that arose in Denmark that was not mentioned in the blog; cross-border shopping (a situation where individuals buy goods abroad due to lower taxes and import them for their own consumption without declaring them in full in order to avoid paying import duties). This is a withdrawal from the circular flow of income and has a negative affect on the economy. There is no easy answer as to whether the abolition of this tax was the right thing to do. As the doctors argue, a year is not long enough to see the tax’s full effect on the public health, however in economics-terms it looks like the drawbacks of this tax could easily weigh out the benefits of it (more of a negative effect on the economy than the strain on the health-care budget is eased, especially due to cross-border shopping).
As for the labeling food that is mentioned in the blog post, I personally feel that it will have minimal effect on the consumption of fatty foods. When people buy fatty foods, I think that often they will just pick it up and buy the same sort of thing every time without giving it much thought; often it will be habit. One wouldn’t bother to look at the label if they have been buying the same product for years. I’m not sure I’d even notice the labels existed unless I read this article.
May Howard-Shigeno