Obesity is an enormous national health problem. Many people, me included, weigh much more than is good for their health. One outcome is that, as a nation, we spend more on health care than we would if people ate less and exercised more.
Some of this additional cost eventually is paid by taxpayers through Medicare, Medicaid and other programs. And fit people pay more for private health insurance because obese people covered by the plan impose higher expenses. So it is a legitimate public policy issue to which economists ought to be able to contribute some insights.
The topic has gotten some attention lately because of New York City Mayor Michael Bloomberg's proposal to ban the sale of large-size soft drinks at establishments in the city. Many studies identify high consumption of high-calorie soft drinks as a major contributor to burgeoning obesity. Serving sizes of soft drinks have increased dramatically in recent decades, as has the frequency with which people buy them. Bloomberg and others want to curb soft drink consumption via bans on large containers or with taxes on such drinks.
Economists generally deem bans counterproductive and economically inefficient. However, the idea of taxing a product or activity that has external costs is solidly mainstream economic theory, accepted by politically conservative and liberal economists alike. The idea is an old one, stemming from work British economist Arthur Pigou did 90 years ago.
“Pigouvian taxes” to offset the external costs of things like air or water pollution are economists' preferred policy measure. But does consuming products like alcohol, tobacco or sugary soft drinks really impose external costs on society in the same way power plant emissions do? Or are they borne only by the person who consumes them?
Alcohol clearly imposes external costs, via harm to third parties from drunken driving, family violence and so forth. Tobacco harms others via second-hand smoke. Both increase health care costs, some of which gets paid by third parties. But with soft drinks, the health costs are the only clear cost that is external to the actual consumer.
Accept that and, in theory, imposing a per-unit tax equal to the external costs of each unit consumed is the best economic measure one could take. But a tax at that level will probably be so small as to have little discernible effect on total consumption or on damage to health.
The problem is that demand for high-calorie soft drinks, as for addictive substances like alcohol and tobacco, is quite price inelastic. That is, it takes a substantial increase in price to appreciably decrease the quantity consumed.
I doubt that the external cost of consuming a can of pop exceeds a dime. Add a dime or even a quarter to the cost of each bottle or can and you will reduce consumption, but probably not by enough to reduce obesity.
From the point of view of economics, making the consumer pay the full social cost of any product consumed corrects the “market failure” that occurs with external costs. But the knowledge that markets are once again efficient is of little comfort to anyone other than economists. And there still will be lots fat people.
Similarly, Washington Post editorial writer Charles Lane is correct in a recent Op-Ed piece that identified U.S. dairy policies as a contributor to higher cheese consumption that in turn contributes to obesity. Cheese consumption, largely on pizza, has increased a great deal in recent decades.
Lane is correct that the basic U.S. milk price policy increases the price of fluid milk and lowers the price of manufactured products compared with what they would be in a free-market situation. U.S. policy consists of “price discrimination,” using monopoly power to increase overall revenues by controlling how much milk goes into fluid milk production and how much into cheese and other manufactured products.
There is no question that Lane gets the economics right. But once again, the practical question of the magnitude of the effects of such federal dairy policies on price and consumption is the relevant one in the real world. And it is pretty clear that while abolishing all federal dairy programs, including those for dairy product promotion, would reduce cheese consumption at the margin, the reduction probably would not be large enough to appreciably reduce obesity.
I'd like to be able to say that economists have the tools to make a dent in this national problem, but honesty compels me to admit that we don't.
Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.
