Economics and Obesity, Essay Example

Obesity, particularly among youth, is a significant public health problem in the US.  Indeed, even with numerous public health campaigns and medical therapies (e.g., pharmacological) aimed directly at helping individuals lose weight, the prevalence of obesity in the US is set to substantially increase over the near-term.  While many individuals question what policy tools exist to deal with this emerging “epidemic”,   economists (particularly behavioral economists) have proposed several traditional economic tools that might incentivize individuals to make healthier decisions:  Broad-based policies such as taxes and food/drink bans.   However, often times these blunt policy tools are difficult to implement evenly across society and may actually lead individuals to more unhealthy behavior.

Before presenting analysis regarding potential policies to deal with obesity, a more fundamental understanding of obesity in an economic context is needed.  From an economic perspective, obesity can be conceptualized as an externality: the question is whether it is a negative externality, a positive externality, or both.  An externality is an activity that results in excessive costs or benefits imposed on the market that is not calculated into the market equilibrium.  For example, pollution is traditionally analyzed as a “negative” externality in that imposes costs on society that are not integrated into the price of producing a certain good.  Obesity is a bit more complex phenomenon than pollution: it undoubtedly has a negative component in that evidence suggests that obese individuals have more health problems and impose more costs on the health care system than non-obese individuals.  In addition, they may also have lower productivity  and their brains may “age” faster making them less competitive in a competitive labour pool.

From this perspective of obesity as a negative externality, economists argue that tools should be implemented to stem obesity and its costs on the system.  Another group argues, however, that obesity is a “positive externality” in that it confers benefits (e.g., food satisfaction and happiness) on individuals. [1] Whatever one’s ultimate conclusion, even accounting for some positive externalities resulting from individual utility, this paper will deal with obesity as primarily a negative externality.  When a negative externality exists, economists think of ways to integrate the added costs in decisions that will hopefully lead to an overall reduction in the behavior.

In the case of obesity, numerous demand-side and supply side initiatives have emerged to cut its overall prevalence.  On the demand side, taxes has emerged as one of the main economic tools to induce healthy behavior.  Taxes have been levied on two different items: 1) fatty foods; 2) health insurance.  Regardless of what good the price is increased, the underlying theory is the same: by increasing the price of the good in question, an individual will consume less, with the main caveat that everything else remains constant.  Denmark is at the vanguard of taxing “fatty food.” In 2011, the Danish government proposed the world’s first “fat tax”: the tax was implemented on all foods with a saturated fat content above 2.3%.  The main purpose behind the tax was to increase the overall price of “fatty” foods thus decreasing their overall consumption in society.  Unfortunately for the Danish government, the fat tax had many unforeseen consequences that prevented  it from achieving its goals including close proximity to Sweden where Danes could purchase fatty foods with fiscal impunity and substantial opposition from domestic groups (mostly producers) that the tax unfairly hit certain foods.  In the end, the Danish government decided to abolish the tax in November 2012.

Increased insurance premiums, that effectively function as a tax, has also been tried to tackle obesity.  Starting in the mid-noughties, but increasing in prevalence over the past couple years, private-offered insurance plans have offered new incentive packages that encourage individuals to lose weight.  In particular, individuals pay a high-deductible, but if they are willing to take several biometric tests (of which BMI is one), they are eligible for savings off their premium rate.  For example, if an individual has a BMI over 30, but is willing to participate in classes to work on it, they save a certain amount off their premium; if they refuse to, they pay  a higher rate (essentially a tax).  Financial incentives for weight loss have had a checkered history: although individuals seem to respond over the short-term to taxes and other financial incentives, over the long-term, they either gain the weight back or refuse to participate in further initiatives.  Thus, while economic theory predicts that higher prices on certain goods will  lead to less consumption of the good, there may be substitutes or the inability to the market in the case of the fat tax, and making insurance premiums increase due to obesity may incentivize inidividuals simply not to seek care about obesity.

Various initiatives have also been tried on the supply side to incentivize healthier decisions.  Perhaps the most popular has been to ban the sale of sugary drinks in NYC: Mayor Bloomberg proposed the ban in 2012 as a means to cut down on the rate of obesity.  The logic  behind this supply side policy is clear: A consumer cannot consume excess calories if they are not available. This policy, however, suffers from similar deficiencies as the Danish tax: the ban is only on certain public establishments meaning individuals can still purchase goods from the grocery store.

Overall, while obesity may impose costs on society, economic policies to date have not effectively dealt with the complex phenomenon in a substantive way.

Sources

Economist (2012).  Obesity as a positive externality. http://www.economist.com/blogs/freeexchange/2007/07/a_positive_externality_of_obes

Washington Post (2012). Danish Fat Tax. http://www.washingtonpost.com/blogs/wonkblog/wp/2012/11/13/denmark-scraps-worlds-first-fat-tax/

Slate (2012). Fat People Do Not Need to be Punished.  http://www.slate.com/blogs/xx_factor/2012/08/03/obesity_and_health_care_punishing_fat_people_is_not_the_answer.html.

Besanko, D. (2008).  Microeconomics.  Southwest Publishing.

[1] This also depends on the assumption that individuals are rational and can effectively parse the costs and benefits of difficult intertemporal trade-offs, which is highly unlikely