In fighting obesity and the high health costs involved, a pigovian tax on unhealthy food is often considered by governments. In 2011, Denmark even implemented the so-called fat tax.
An important reason for implementing the tax is enforcing a change in consumer behavior by changing the relative price of healthy food with respect to unhealthy food. Another reason is covering the social (health) cost associated with unhealthy food patterns that can lead to obesity. Buying unhealthy food will make you contribute to these costs though the tax.
This article focuses mainly on the first mentioned reason and argues that this reason is not legitimate when we look more closely at the market and consumer preferences.
The movie Food, Inc. by director Robert Kenner, is a fascinating movie on how the American food industry is manipulated to serve the consumer with low priced unhealthy food. It highlights briefly the largest group within these consumers: the poor. According to a research by Truong & Sturm (2005) this is exactly the group with the biggest obesity problems.
The relative price increase of a normal good in general cause less consumption of this good with respect to the other goods in the market. Lets assume that there are two types of goods: healthy and unhealthy meals. The idea is that a consumer will substitute the unhealthy food for the now relative less expensive healthy food.
Imagine a low-income family, in which both parents work a lot. Driving to a fast food restaurant on regular basis to get a quick and relatively cheap meal is beneficial for them. The effect of a price increase in the unhealthy meal will cause a different effect for them than the just described general thought. Until a certain price this family will considers a fast food meal to be a Giffen good. This means that the positive income effect is larger than the negative substitution effect for the unhealthy meal. The low-income family has to visit the fast food restaurant an additional time in the week because of a decrease in their purchasing power.
Also in supermarkets the tax will not give the expected result. Supermarkets will spread the costs of the fat tax across all products, like they did in Denmark (The Economist, 2012). The general idea of will not work out. For those who consider both types of food as normal goods, behavior will not change since relative prices stay the same. According to the reasoning above this will again cause contrasting behavior of the low-income family.
Even if there is a general substitution away from the taxed unhealthy food, consumers will and can easily substitute unhealthy food for other untaxed unhealthy alternatives (Smed et. al., 2005). There is a lot of discussion on the definition of unhealthy food, however it is not the type, but the amount consumed that causes obesity.
To conclude, a fat tax will have a negative impact on the purchasing power of consumers. More important this government intervention will not cause the expected results in consumer behavior. The only substitution away will be to other types of unhealthy food. Consumers with lower incomes (the group considered to be most likely facing obesity problems) will even show behavior contradicting the general theory. The fat tax is therefore not the right tool to change behavior in unhealthy food consumption.
Stefanus Leeffers (#642)