Economics of Obesity: Can Food Taxes Create a Healthier Society?

As the obesity crisis in Britain intensifies, so too does the debate around how to tackle it. With obesity costing the UK an estimated £98 billion annually and placing a significant burden on the NHS, it's clear that something must be done. A growing chorus of voices, supported by recent polling, suggests that the solution may lie in taxing companies that produce unhealthy foods. But can taxes alone turn the tide of this public health crisis, or do they risk deepening inequalities?

The Case for Taxation

The idea of imposing taxes on companies that produce junk food or ultra-processed foods is not new, but it’s gaining traction. According to a survey by Ipsos for the Health Foundation, a majority of Britons support such measures. 58% of respondents favored taxing companies that produce foods high in sugar or salt, with the revenue used to provide fresh fruit and vegetables for low-income families. The idea here is simple: if unhealthy foods become more expensive, people might consume less of them, and the funds raised can be redirected to promote healthier diets.

The economic rationale behind this approach is rooted in the concept of externalities—costs or benefits that affect a third party who did not choose to incur them. In this case, the health impacts of obesity are a negative externality. Junk food producers profit from their sales, but society bears the brunt of the health consequences, such as increased healthcare costs. By taxing these companies, the government can internalize these externalities, making the price of unhealthy foods reflect their true cost to society.

More here drawing on recent research from UCL

Examples from Abroad

Looking abroad, Mexico provides a compelling case study. The country implemented an 8% tax on non-essential, energy-dense foods like sweets, chocolates, and sugary cereals. The result? A reduction in the sale of these foods by up to 40% in some retailers, with the most significant drop among low-income groups who are often the most vulnerable to diet-related health issues.

This is where elasticity of demand comes into play. For low-income consumers, the demand for unhealthy food is more price-sensitive—meaning that a tax increase leads to a significant decrease in consumption. However, critics argue that without corresponding subsidies for healthier foods, these taxes could disproportionately burden poorer households. The solution may lie in a combination of taxes and subsidies, which could shift consumption patterns without exacerbating inequality.

Risks and Challenges

Despite the potential benefits, taxing junk food isn't without its challenges. Critics, including the Food and Drink Federation, argue that rather than imposing taxes, the government should incentivize companies to develop healthier products. There is also concern that such taxes could lead to unintended consequences, such as consumers switching to other unhealthy options that are not taxed, or companies passing the costs onto consumers, further straining household budgets.

Dr. Chris van Tulleken, author of "Ultra-Processed People," cautions against a blanket tax on all ultra-processed foods, suggesting instead that individual products should be targeted. This approach could avoid the pitfalls of a one-size-fits-all policy and allow for more precise regulation of harmful products.

Exam-Style Discussion Questions

1. Evaluate the effectiveness of taxes on unhealthy foods as a means to reduce obesity rates.
2. How might elasticity of demand influence the effectiveness of taxes on junk food, particularly among different income groups?
3. What are the potential risks of relying on taxation as the primary tool for combating obesity?
4. Compare and contrast the impact of food taxes with alternative public health interventions, such as education campaigns or food labelling regulations.
5. To what extent do taxes on unhealthy foods address the externalities associated with obesity?

Glossary of Key Economic Terms

• Elasticity of Demand: A measure of how much the quantity demanded of a good responds to a change in the price of that good.
• Externality: A cost or benefit for a third party who did not agree to it. In the context of obesity, negative externalities include healthcare costs borne by society.
• Obesity: A medical condition characterized by excess body fat, which increases the risk of various health issues such as heart disease, diabetes, and cancer.
• Pigouvian Tax: A tax imposed on activities that generate negative externalities to correct an inefficient market outcome.
• Price Elasticity: The responsiveness of the quantity demanded of a good to a change in its price.
• Subsidy: A financial assistance given by the government to encourage the production or consumption of a particular good.
• Ultra-Processed Foods (UPF): Industrially manufactured foods that typically contain multiple ingredients and additives, often linked to negative health outcomes.
• Negative Externality: A situation where a product or decision costs society more than its private cost.
• Public Health: The health of the population as a whole, often regulated and protected through government policies and programs.
• Regressive Tax: A tax that takes a larger percentage of income from low-income earners than from high-income earners.

Retrieval Questions for A-Level Students

1. What percentage of respondents in the Ipsos survey supported a tax on foods high in sugar or salt?
2. How much is obesity estimated to cost the UK annually?
3. Which country implemented an 8% tax on non-essential, energy-dense foods?
4. What is an externality, and how does it relate to the discussion of food taxes?
5. What is the difference between a Pigouvian tax and a regressive tax?
6. How did Mexico’s tax on unhealthy foods impact low-income groups?
7. What are ultra-processed foods, and why are they a focus of public health concerns?
8. What argument does the Food and Drink Federation make against taxing junk food?

Key Points or Facts Relevant to This Article

• Public Support for Taxes: Majority support for taxing junk food and ultra-processed food producers in the UK.
• Economic Impact: Obesity is a significant economic burden, costing the UK £98 billion annually.
• Case Studies: Mexico's successful implementation of food taxes that reduced unhealthy food consumption.
• Elasticity of Demand: Taxes on unhealthy foods can be particularly effective in reducing consumption among low-income groups.
• Policy Considerations: Balancing food taxes with subsidies for healthier options to avoid regressive impacts.