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: C ost 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: p F F + p G G = M where: M – income P F – price of junk food P G – 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 p F and p G

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