Junk Food, Physical Activity, and Obesity: The Effect of the Fat Tax and the Thin Subsidy

by

Odelia Rosin, Yossef Tobol, Gideon Yaniv

Obesity is a major health and economic problem (especially in the US and UK)

• About 66% of adults in the US are either overweight or obese

• Between 1980 and 2004, obesity in the US more than doubled, from 15% to 32%

• In 2001, the economic cost of obesity in the US amounted to $117 billion, including:

• Cost of surgery and treatment of complications of chronic

diseases associated with obesity (hypertension, heart disease,

type 2 diabetes)

Productivity loss due to morbidity and mortality

Expenditures on appetite-reducing drugs

Cost of weight loss programs

Economic Incentives to Combat Obesity

Aim at affecting consumer behavior through changing the relative price of junk and healthy foods

A well-known proposal:*

• Impose a “fat tax” on junk foods

• Use the tax revenue to finance a “thin subsidy” to healthy foods

_________________________________________ *Recently supported by the World Health Organization

Economic Literature

The economic literature on rational high-calorie

consumption and obesity is still in its infancy:

• Most of the economic literature on obesity is empirical, inquiring

into the causes of the observed rise in obesity over time

• Only a few papers address the individual’s decision to consume

high-calorie foods while rationally taking into account the

adverse effects on his/her health and life expectancy

Examine the effectiveness of the fat tax and thin subsidy

in reducing obesity within a food-intake and physical-

activity rational-choice model

Challenging hypothesis:

While the proposal is likely to reduce junk food

consumption, it might act to reduce physical activity.

Consequently, obesity might even increase!

Purpose of research

The setting

• An individual consumes junk food meals and healthy meals

• Junk food meals are purchased from a restaurant.

• Healthy meals are cooked at home with inputs of health

ingredients and time.

• Income is spent on the purchase of junk food meals and

health ingredients

• Time is spent on cooking, physical activity, and leisure

(working time is institutionally fixed)

F – junk food meals

H – healthy meals

G – cooking ingredients

k – cooking time

x – physical activity time

l – leisure time

Variables: (to be chosen by the individual)

Constraints

Budget constraint:

pF F + pGG = M where: M – income PF – price of junk food

PG – price of healthy food

Time constraint: k + x + l = 24

Production function: H = Min(G/ , k/)

where: , – technology coefficients

Consumption function: C = F + H

where: – taste coefficient

Obesity function: S = F – x

where: , – calorie intake and outtake coefficients

• Utility function: U = U(C, l)

Functions

The individual’s choice Assumption:

The individual seeks to maximize his/her net utility:

Max NU = U(C, l) – S

subject to his/her production and consumption functions

Procedure:

• Substitute the production and consumption function into the net utility function

• Formulate net utility in terms of F and x

• Differentiate net utilty with respest to F and x (first-order conditions)

• Totally differentiate the first-order condition with respect to pF and pG

Three types of individuals

Weight unconscious

Weight conscious but physically

inactive

Weight conscious and physically active

Conclusions The effects on obesity of the fat tax and the thin subsidy