THE ECONOMIC EFFECTS OF SODA TAX

Greg Mankiw (link) and David Leonhardt (link) have opened a debate on whether govenrment policymakers should levy a tax on soda and other soft drinks as an attempt to reverse the growing trend of obesity among the U.S. population. The idea of taxing soda has become popular as governments around the world have recorded high budget deficits and revenue shortfall. The real question is what would be the effects of taxing soda and, if so, would the introduction of the tax contribute to the reversal of the obesity pattern, especially among the child population.

There is a decent amount of empirical studies and health policy analyses on the patterns and causes of obesity. Obesity and the risk of premature death resulted from high blood pressure and the potential heart attack is the most individual cost of fast-food consumption. For a long period of time, we assumed that these costs at the individual level could be internalizied and, thus, raise no cost to the society. In the article published in Sunday's edition of NY Times Greg Mankiw drew parallels between soda and tobacco tax. If individuals consume a lot of cigarettes at home, there is, presumably, no negative externality shifted onto the society. The logic could be applied to soda taxation. However, there is a flip side to the argument. Taxing soda, tobacco and other goods with a negative impact on bystanders is an answer to the growing cost of health care delivery to the individuals who consume these goods. The adverse impact levied on other individuals is seen through higher health insurance premiums and total cost of health care.

John Cawley published an extensive analysis of the causes of early childhood obesity (link), suggesting greater government intervention and various cost-effectiveness measures to mitigate the adverse impact of childhood obesity on other members of the society. A study by Jason M. Fletcher, Daniel Frisvold and Nathan Tefft (link) has been one of the first attempts to measure the effect of vending machines restriction on childhood obesity. The authors concluded by suggesting higher tax rates and soft drink access restrictions in schools to fight the on-going increase in childhood obesity.

As Kelly Brownell of Yale Rudd Center for Food Policy and Obesity mentioned, the link between sugary drinks and obesity is stronger than the link between obesity and any other kind of food (link). The evidence suggests that distance from fast-food restaurant is a significant feature of childhood obesity. A study conducted by Janet Currie et. al (2009) has shown that among children in the 9th grade, a fast-food restaurant within 1/10 of the mile in school is associated with at least 5.2 percent increase in obesity rates (link). The study found that the direct impact of distance from the fast-food restaurant is significantly larger for less educated African-American and less educated women.

The question is whether taxing soda and other kinds of fizzy drinks could potentially reduce and/or reverse the growing trend of obesity. The basic question to start with, is what is the elasticity of demand for soda drinks. The estimates suggests that price elasticity of demand for the majority of soda drinks ranges from -0.8 to -1.0. For example, -1.0 elasticity coefficient suggests that a 10 percent increase in the price of soda would - ceteris paribus - lead to 10 percent decrease in soda drink consumption. The price elasticity of demand for soda drink is relatively high considering that coefficients of price elasticity of demand for other kinds of food ranges from -0.2 to -0.5. If policymakers considered the introduction of a tax on soda consumption, the relevant question is who would bear the burden of the tax? Given elastic demand, the tax would be beared by consumers. However, high price elasticity of demand suggests that there is a widely availible range of close substitutes with potentially negative adverse effects for the individuals. So it is not unlikely that children would switch to other kinds of fast food with equally negative impact on obesity, blood pressure and quality of living.

Given the lack of experiments and availibility of household surveys, it is difficult to estimate the consumer response to the introduction of tax on soda. The estimate of price elasticity of demand suggests that part of the tax would be beared by the consumer. However, it also suggests that a change in the relative price of soda would induce children to consume other varieties of fizzy drinks. Experimental studies by health policy experts suggests different approaches to tackling the adverse impact of soda drinks and other kinds of fast food. The most notable approach is the restriction of vending machines in school districts. However, restricting the access to vending machines would encourage the consumption of fast food outside school districts. A general tax on soda would be preferable to the restrictions of access of vending machines. There is absolutely no doubt that a tax would discourage consumption of soda and other kinds of fast food. Estimates suggest that soda and other kinds of fast food such as hamburgers, donuts and cakes are complementary. Assume, the cross-price elasticity of demand for burgers is -0.9 Thus, if the price per unit os soda increases by 10 percent, the demand for donuts, burgers and cakes decreases by 9 percent (0.9×10 percent). Since a tax on soda would raise the relative price of soda, the consumption of these kinds of fast food would diminish, resulting in less adverse impact of fast food consumption on the individuals. I would disagree with the statement that negative externalities from soda and fast food consumption are internalized by the individual. For example, an article by Trasande, Liu, Fryer and Weitzman (2009) published in Health Affairs (link) investigated the annual cost of childhood obesity in the U.S. between 2001 and 2005, based on the nationally representative data from U.S. hospitals admissions. The authors found that from 1999 to 2005, obesity-related hospitalizations doubled. In addition, costs related to hospitalization, treatment and diagnosis of obesity increased from $125.9 to $237.6 million, an 88.7 percent increase. The cost is partly beared by Medicare while the rest of the total cost is beared by the private insurance premiums.

Given the perverse system of employer-provided health care and implicit subsidizing of health insurance suppliers by the federal government, the periodic increase in obesity-related health care costs indicates a further rise in Medicare expenditures and health insurance premiums. In such conditions, there is little incentive for children and parents to reverse the consumption of soda drinks and fast food. Taxing soda and complementary fast food is a step in the right direction. But it should be noted that the introduction of a tax on soda should be compensated by a corresponding decrease in personal income tax. However, without the parent-guided awareness of the adverse impact of fast food on obesity, it would be difficult to reverse the increasing pattern and cost of childhood and adult obesity. Therefore, much of the obesity-related health care risk in childhood can be solved within the household. It would be irrational and foolish to believe that a tax on soda and government paternalism could solve the obesity puzzle and mitigate its neighborhood effects on bystanders.

MINIMUM WAGE AND OBESITY

David O. Meltzer and Zhuo Chen explored the relationship between minimum wage rate in the U.S and body weight (link):

"Growing consumption of increasingly less expensive food, and especially “fast food”, has been cited as a potential cause of increasing rate of obesity in the United States over the past several decades. Because the real minimum wage in the United States has declined by as much as half over 1968-2007 and because minimum wage labor is a major contributor to the cost of food away from home we hypothesized that changes in the minimum wage would be associated with changes in bodyweight over this period. To examine this, we use data from the Behavioral Risk Factor Surveillance System from 1984-2006 to test whether variation in the real minimum wage was associated with changes in body mass index (BMI). We also examine whether this association varied by gender, education and income, and used quantile regression to test whether the association varied over the BMI distribution. We also estimate the fraction of the increase in BMI since 1970 attributable to minimum wage declines. We find that a $1 decrease in the real minimum wage was associated with a 0.06 increase in BMI. This relationship was significant across gender and income groups and largest among the highest percentiles of the BMI distribution. Real minimum wage decreases can explain 10% of the change in BMI since 1970. We conclude that the declining real minimum wage rates has contributed to the increasing rate of overweight and obesity in the United States. Studies to clarify the mechanism by which minimum wages may affect obesity might help determine appropriate policy responses."

CANADIAN AND THE U.S HEALTH CARE SYSTEMS COMPARED

A study by June O'Neill and Dave M. O'Neill (link) suggests that the U.S health care system provides more choice, efficiency, better delivery and capacity than the Canadian system:

"Does Canada's publicly funded, single payer health care system deliver better health outcomes and distribute health resources more equitably than the multi-payer heavily private U.S. system? We show that the efficacy of health care systems cannot be usefully evaluated by comparisons of infant mortality and life expectancy. We analyze several alternative measures of health status using JCUSH (The Joint Canada/U.S. Survey of Health) and other surveys. We find a somewhat higher incidence of chronic health conditions in the U.S. than in Canada but somewhat greater U.S. access to treatment for these conditions. Moreover, a significantly higher percentage of U.S. women and men are screened for major forms of cancer. Although health status, measured in various ways is similar in both countries, mortality/incidence ratios for various cancers tend to be higher in Canada. The need to ration resources in Canada, where care is delivered "free", ultimately leads to long waits. In the U.S., costs are more often a source of unmet needs. We also find that Canada has no more abolished the tendency for health status to improve with income than have other countries. Indeed, the health-income gradient is slightly steeper in Canada than it is in the U.S."

THE ORIGINS OF OBESITY

David Cutler, Ed Glaeser and Jesse Shapiro provide the evidence of high rates of obesity in the United States (link):

"Americans have become considerably more obese over the past 25 years. This increase is primarily the result of consuming more calories. The increase in food consumption is itself the result of technological innovations which made it possible for food to be mass prepared far from the point of consumption, and consumed with lower time costs of preparation and cleaning. Price changes are normally beneficial, but may not be if people have self-control problems. This applies to some population."

ANOTHER EVIDENCE WHY EU FARM SUBSIDIES ARE DEADLY HARMFUL

EU Observer has recently quoted (link) the study conducted by a team of British scientists showing that, each year, farm subsidies on behalf of EU's common agricultural policy cause strong heart diseases and stroke-related deaths as a consequence of too high nutrition values per se, given the amount of fat that farm producers can use to produce food. This is an additional sign why EU's common agricultural policy is a roadmap in the wrong direction. Taking some basics of the microeconomic theory into account, we can see that EU farm subsidies lead to massive overproduction of milk and diary products simply because producers do not meet a sufficient amount of market information as a consequence of subsidy distortions. Again, subsidies can be attributed only if there is more negative neighborhood effects that the amount of positive ones while agricultural sector is a case study that would suffice the criteria for subsidy giving as there is a market-clearing price mechanism. World Health Organization revealed that EU's annual milk production subsidies amount 16 billion EUR, including a 500 million EUR butter consumption stimulus.

The EU Observer noted (link):

"Looking at the 15 EU states before the 2004 round of enlargement, the annual "mortality contribution attributable to CAP was approximately 9,800 additional CHD deaths and 3,000 additional stroke deaths within the EU," the study says, with France, Germany, Italy, Spain and the UK seeing the highest numbers of excess deaths."

Market liberalization and an immediate end of subsidizing agricultural production would certainly boost the shift towards consumer choice and demands. In turn, that would also bring positive neighborhood effects since producers' prices would be closer to marginal cost level which means that the severity of heart diseases and stroke-related deaths and consequences would disappear faster and easier. Frankly, it's about time to end the tyranny of EU's agricultural subsidies and CAP. The effect of farm subsidies revealed by British scientists are another strong argument and evidence of the mischief of subsidy-giving.

IS SLOVENIA'S HEALTH-CARE SYSTEM SUSTAINABLE?

Institute for Economic Research in Health Care (INERHC) issued a thorough economic analysis and review of Slovenian health-care system (link). Previously, the institute issued a publication in which institute's experts analyzed the financial sustainability of government-mandated health-care system in Slovenia (link).

THERE'S NO SUCH THING AS FREE LUNCH IN HEALTH-CARE

The U.K. Daily Telegraph reports on the persistent sentiments to limit and ration the access to health-care services for older people and individuals with different lifestyles. As Investor Business Daily succinctly commented, the denial of health-care services is more probable when government is in charge of it. In fact, government monopoly on health-care might explain some reasons for obesity and other particular man-made diseases simply because the individuals do not, in this case, bear full costs of reckless behavior and instead rely on government support.

INDIA'S DRUG MARKET TO REACH $20 BN CAPITALIZATION BY 2015

Currently, the retail sales value of India's high-growing drug market is on the solid path to sustain sound growth of market capitalization. Financial times reports that Indian drug market is projected to reach a remarkable $20 billion USD net capitalized value by 2015. India, with an outstanding 8,4 percent growth rate driven by high-return investment infusions, outperforms the rest of the world as is estimated to grow by 7,8 percent in 2008 (link).

It is noteworthy that India's human capital sector is growing rapidly, with two universities among top 100 Asian universities (link). Significant gains in output growth reflect the India's composition of the GDP where services dominate 60,7 percent of the GDP.

The forecast is favorable for the drug market, implying a forecasted 12,3 percent growth rate annually. The mechanics behind the significant growth of drug market can be explained by both, supply and demand. On the side of demand; with regard to market preferences (utility functions), a growing income standard leads to a growing demand for specific drugs driven by high rates of chronical diseases in India.

On supply side, India's pharmaceutical industry is processing a sectoral and price convergence of productivity and product quality, leading to new varieties of product choice delivered on the market to improve the health-care conditions individually.

Private investment such as hospital chains can naturally generate greater revenue and profit as opposed to public hospitals, and consequently higher rate of overall market capitalization which is an important aspect of international sectoral competitiveness.

Even health insurance is expected to double by 2015. As a responding incentive, new insurance claims and joint-ventures (to reduce the risk of sufficent capital allocation) could further boost the volume of capitalization and the size of investment pouring into India's high-growing health-care sector. Openness to technological innovation is an important pre-condition for delivering external results to match-up the relationship of supply and demand in the market.

One of the questions is whether government should intervene the drug market and impose price controls? The imposition of price controls negativelly affects both, supply and demand, in the long run. In fact, if a national agency or some governmental body decides to fix the price of qualified drugs, it cannot reach supposed results due to the lack of supply information. If government officials decide to lower the price of genetic drugs where the elasticity of demand is prone to changes in price and quality, then lower price fixation would result in shortages of supply of generic drugs.

On the other side, the upward fixation of the price could result in an unsold surplus and the demand side would be denied the access to generic drug products due to higher price which obviously wouldn't match the demand precisely. The excess regulation of health insurance and subsidies attached to generic industry through hidden contract inversion, delivers negative results and side-effects nevertheless.