Junk Food Tax or Health Food Subsidy – Which Results in Healthier Food Purchases?

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Image by Jeff Keen.

In the past few years several prominent researchers have argued for the adoption of taxes on junk food as a means of reducing their consumption.  Often, as in a recent editorial in the New England Journal of Medicine, the argument is made that money collected through the tax could then be used to subsidize healthier foods.  This is an idea that I’ve found very appealing – we make the bad foods more expensive, the good foods less expensive, and people will probably shift at least some of their purchases to those healthier options.  But a very interesting new study by Leonard Epstein and colleagues suggests that things might not be so simple.

The paper starts with some very interesting background information on the cost of food over the past few decades.  For example, relative to other goods and services, current food prices are 38% lower than in 1978 (although the absolute cost of food has increased due to inflation).  And while overall the absolute cost of food has increased, this increase has been far greater in healthy foods than in unhealthy foods.  The graph below shows the increased cost for various foods since 1983.  As you can see, the cost of fresh fruit and veggies has increased by nearly 200% – 3 times greater than the increase seen in sugars and sweets, and roughly 6 times the increase seen in carbonated beverages (For a terrific exploration of why junk food can be so much cheaper than healthier alternatives, be sure to check out The Omnivore’s Dilemma by Michael Pollan).

Based on data published by Finkelstein et al., as cited by Epstein et al.

Epstein and colleagues point out that food prices have a strong influence on purchases, which makes it seem very reasonable that the relative changes in the cost of healthy and unhealthy foods over the past 25 years could be influencing food purchases, and therefore obesity rates. For this reason, changing the cost of food through the use of taxes and/or subsidies are obvious targets to curb caloric consumption at the societal level.  But they also point out that intentionally manipulating the price of food could have unintended consequences, especially with respect to subsidies for health foods.  For example, if health foods are subsidized, it is likely that people will buy more of them, which seems like a good thing.  But it is also very possible that people may use the money they save on subsidized health foods to buy even more junk food – an unintended consequence that I had never really considered.  Thus, the authors performed a small experiment to determine the effect of both fat taxes and health food subsidies on food purchasing behaviours.

Participants in the study included 42 mothers who were also the primary food shopper for their family.  The mothers were then placed in a laboratory fitted out to resemble a grocery store, and given $22.50 per family member and told to:

“imagine that she had no food in her house and that the money she was given was to be used to purchase groceries for her family for the week”.

Participants were told to spend all of their money, and each participant went “shopping” 5 times – once with all foods priced accurately, twice with the cost of healthy foods lowered (by either 12.5% or 25%), and twice with the cost of unhealthy foods increased (again by 12.5% and 25%, respectively).  So, what happened?

As you might expect, as the cost of unhealthy foods was increased, the amount of total calories purchased was significantly reduced.  However, as the cost of healthy foods was lowered, the total number of calories purchased actually increased.  In other words, people were using the money they saved on healthy foods to purchase more unhealthy foods.  A health-food subsidy of 12.5% resulted in about an 800 calorie increase in total calories purchased, while a health-food subsidy of 25% resulted in an increase of about 1,500 calories.  So it seems that the health-food subsidy may not just increase the purchase of health foods – it may increase the purchase of all foods, regardless of their nutritional value.

Now there are obviously a lot of caveats to a study like this, and the authors are quite cautious in how they interpret their results.  For starters, participants were told that they had to spend all of their money during each trial, which makes it almost impossible for the health-food subsidy to result in anything but an increase in total food purchases.  So for that reason alone I’m pretty hesitant to take this study as evidence that subsidizing health foods is a bad idea.  But it is interesting, and I’m really curious to see if this finding is supported by studies looking at more “real world” settings.

The paper is published in the journal Psychological Science and it’s free to the public although it’s behind a paywall, I’d really recommend you check it out.  Some of their graphs (which I couldn’t re-publish here due to copyright issues) are especially worth the download.

UPDATE: My friend Laura has just posted on my Facebook wall that junk foods are an example of what economists call a “Giffen Good“, which is a good which people consume more of when prices rise, violating the law of demand.  From Wikipedia:

The classic example given by Marshall is of inferior quality staple foods, whose demand is driven by poverty that makes their purchasers unable to afford superior foodstuffs. As the price of the cheap staple rises, they can no longer afford to supplement their diet with better foods, and must consume more of the staple food.

“As Mr.Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.”
—Alfred Marshall, Principles of Economics (1895 ed.)

I know next to nothing about economics, but I find this pretty interesting, and would love to hear the opinion of anyone who knows more about it than I.

So what do you think – are taxes and/or subsidies a good or bad idea?

Travis Saunders

ResearchBlogging.orgEpstein, L., Dearing, K., Roba, L., & Finkelstein, E. (2010). The Influence of Taxes and Subsidies on Energy Purchased in an Experimental Purchasing Study Psychological Science, 21 (3), 406-414 DOI: 10.1177/0956797610361446

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