The specific economic question in this analysis is whether taxes on unhealthy foods or subsidies on healthy foods are an efficient response to current market conditions. Economists define market failure as occurring when actors outside of a market transaction incur/reap the costs/benefits of that transaction. Take, for example, a scenario where a polluting factory in one town dumps its waste into a river. In the factory town, there may be a local ordinance requiring the polluting factory to pay the town to help decontaminate local drinking water. Thus, the costs of pollution are said to be fully accounted for by this redistributive policy. However, a nearby town downstream which does not fall under that local ordinance may still suffer from the pollution being dumped upstream. Because the polluting factory is outside the jurisdiction of the downstream town, they cannot levy taxes or impose other regulations of the polluting factory. This town faces a negative externality from the upstream polluter.

The same concept can be applied to eating unhealthy foods. If consumers do not accurately account for future costs of over-eating unhealthy food today (money spent on doctor’s visits, blood draws, risk of developing diabetes, etc.), then they may be failure in the market for food. Furthermore, if consumption of unhealthy foods were widespread, health insurance companies might react to a decline in public health by increasing health insurance premiums, placing an unnecessary and unfair burden on individuals who eat healthy and avoid these risky behaviors. Standard economic theory would suggest that a per-unit tax should be imposed on goods that are over-consumed in a market; fast food, soft drinks, and vending machine snacks could very reasonably be considered to be over-consumed in the market today, while dark green vegetables and fresh fruits might be said to be under-consumed in the market, thus requiring a market-correcting subsidy. Yet the decision to impose taxes or subsidies on food products may not be so straightforward.

Economists use the concept of a “substitute good” to define any product which a consumer will switch to if a similar good becomes too highly priced. For example, if the price of milk rose dramatically (if there was a widespread disease which resulted in contaminated cow’s milk for example), then consumers might reasonably start buying more soy milk to eat with their breakfast cereal. This idea of a substitute good can be applied more broadly to a range of unhealthy foods. In order for policymakers to efficiently regulate the market for unhealthy snack food, they would have to apply taxes to all so-called “unhealthy” foods and their substitutes. Furthermore, if consumption of some unhealthy foods does not change dramatically with price shifts, per-unit taxes may not achieve their desired effect (imagine a tax on birthday cakes: if consumers value splurging for friends and family once a year and, for cultural reasons, enjoy doing so by purchasing cake, they may not be sensitive to moderate price increases). A final consideration: increasing the price of food will have the greatest effect on low-income consumers, who are already the most-malnourished members of society. For these low-income members of society, a subsidy on healthy foods may be have a larger effect on public health than a tax on unhealthy foods. And then, of course, we would have to agree as to what constitutes a “healthy” food, and medical, biological, and cultural definitions of “healthy” might be contested in different communities.

Policymakers face many challenges as they consider a variety of policies to increase public health by promoting healthy food/regulating unhealthy food. Their decisions are made more complex by the issues stated above, and activists demanding change in current policy should be aware of the language and terms of the debate if they wish to change the social norms around food and public health.

Fast Facts

• “Sin taxes” on unhealthy foods can, in theory, lead to an economically efficient outcome, but such taxes are regressive in nature
• Current economic research suggests that small taxes/subsidies do not significantly alter BMI or obesity prevalence; however, children and adolescents do benefit from even small price controls (Powell & Chaioupka, 2009)
• Policymakers have to consider substitute goods and cultural trends when determining which foods/beverages to tax/subsidize
• It will be very difficult to efficiently tax/subsidize foods/beverages in ways that will maximize economic efficiency