Social Desirability and Effectiveness of a Junk Food Tax in

Countering Obesity and Dietary-Related Disease in Canada

Name: Tanya Shukla

Date: 2019-03-20

Student Number: 250964516

Class: Economics of Health Care 2169G

University of Western Ontario

Word Count: 2604

 The rapid proliferation of obesity rates in the developed world has been met with increasing

concerns for dietary health. According to the Organization for Economic Co-operation and Development

(OECD), obesity rates in Canada among the adult population grew from 10% in 1970 to 26% in 2011

(OECD, 2011). As this portion of the nation’s population continues to rise, the associated direct and

indirect economic costs are becoming increasingly apparent, placing a large strain on financial stability

and intellectual capital of the economy while limiting the country’s ability to address alternative issues.

Meanwhile, corporations are eagerly taking opportunities to satisfy the increasing demand for junk foods,

ushering market failure in the form of overconsumption of a demerit good. In turn, government

intervention by taxation is justified to negate the externalities associated with junk food consumption. The

economic and social shortcomings to these interventions demonstrate the complexity of this issue, as

policy makers attempt to maintain a careful balance between public health goals, economic prosperity and

social equity. For Canadians, as the challenges and consequential effects of increasing obesity rates are

realized, there is a dire need for comprehensive reform in the regulation of unhealthy foods and

cooperation with social programs for effective change.

Obesity is defined as having a Body Mass Index (BMI) of greater than 30 (Janssen, 2013). As

previously mentioned, the adult obesity rate has more than doubled in the span of 40 years, while the

prevalence of obesity among children ages 12 to 17 has nearly tripled to 12% in 2011 (Janssen, 2013).

The effects related to obesity are also evident through the recent analysis of clinical literature, finding

direct associations between obesity and the incidence of type II diabetes, several types of cancers and

severe forms of cardiovascular diseases. For example, 33% of Canadians that are classified as obese have

high blood pressure, compared to only 15% of those who are not (​Public Health Agency of Canada,

2011)​. Furthermore, obesity is directly attributed to 20% of annual premature deaths in Canada (Janssen,

2013). Evidently, obesity plays a significant role in the mortality and morbidity rates of Canadians and
should be regarded as a public health concern, deserving the attention and intervention of health officials.

The effects of obesity are experienced not only by the individual, but also their fellow citizens through the

resulting negative externalities associated with overconsumption of unhealthy foods. In a society with

socialized health care, the costs of an unhealthy diet are spread among the taxpayers, regardless of their

own health conditions. Direct economic costs associated with treatment, care and rehabilitation for obese

individuals has expanded to a total of $3.9 billion annually (Janssen, 2013). Additionally, the economic

output lost as a result of premature deaths and increasing morbidity has amounted to indirect economic

costs totalling $3.2 billion annually (Janssen, 2013). As a result of rapidly increasing direct and indirect

costs of obesity, government expenditure is being allocated for the support of these individuals, rather

than being spent on prevention or alternative government programs. Furthermore, increasing rates of

mortality and morbidity decrease the quality of life in Canada, impacting its standing on the World Health

Report. An often overlooked indirect cost is the loss of productivity as a result of social stigma

surrounding obese individuals. Recently, self reported studies indicate that perceived weight based

discrimination in employment settings commonly exist among obese persons. In a survey based study of

obese individuals, 43% of participants reported weight based bias from their supervisors or employers,

while 54% reported weight stigma from coworkers (Puhl and Heuer, 2009). A systematic review of this

study highlights the disadvantages faced by obese peoples in hiring, promotions and wages in the

workplace. The study also finds that obese students face significant obstacles to educational achievement

due to targeted derogatory humour. Evidently, the stigma surrounding obese individuals could ultimately

worsen the intellectual capital of the population as a whole. Overall, the adverse societal impacts of

obesity has created a market failure due to overconsumption of unhealthy foods, in which case

government intervention is both justified and required.

 In the case of obesity, government intervention is justified due to the presence of a negative

consumption externality associated with the overconsumption of a demerit good; that is junk food. As

previously discussed, this externality imposes a variety of direct and indirect costs to society. Due to these

costs, the private benefit received by an individual consuming one additional unit of junk food is greater

than the benefit experienced by society. ​Appendix A​ displays a diagram exhibiting the divergence between

marginal private benefit (MPB) and marginal social benefit (MSB) along with its associated welfare loss

to society. Segment ​AB​ ​represents the external costs of consuming one extra unit while area ​CDE​ is the

deadweight loss experienced as a result of consuming at a nonoptimal level. The divergence between

MSB​ and ​MPB​ indicates the requirement for a higher market price due to the good’s high external costs.

Economic principles state that an externality can be offset by introducing a tax which is equivalent to the

value of the externality. Consider an ad valorem tax imposed on the market exhibited by the

counter-clockwise rotation of the supply curve from ​S t​ o ​S + tax. ​The indirect tax causes an increase in

production costs thus decreasing supply of the good in the market. Consequently, as proven by the ​law of

supply,​ a lower quantity supplied will result in a higher market price of ​PT​ ​ and
​ offset the negative impact

of the externality while lowering consumption to socially a optimal level ​QS​ .​ In ​appendix A,​ area ​(P​T​ P​P​ g

f)​ represents the total tax burden on consumers while area ​(P​P​ P​S​ d g)​ represents the burden on the

producers. ​Appendix A​ is the theoretical impact of imposing an indirect tax on a demerit good, however,

the market for junk food proves to be different. Junk food consumption triggers a dopamine response

similar to that of addictive drugs and is a leading cause of increasing obesity rates. Further, the term “junk

food” is very broadly defined. Both of these factors contribute to its relatively inelastic demand curve,

meaning quantity demanded is less reactive to changes in price. When applying the theory of elasticities

to this market, it is assumed that the price elasticity of demand is less than the price elasticity of supply.

Appendix B r​ epresents this condition in a diagram by demonstrating how a relatively inelastic demand

curve results in a greater incidence of the tax for consumers. As displayed in the diagram, the
implementation of an ad valorem tax results in a total tax burden on consumers represented by area ​(P​1 P
​ ​O

b a)​ which is substantially greater than the tax burden on producers given by area​ (​ PO​ ​ P​2​ c b)​. Due to its

addictive nature, relatively cheap prices and the absence of close substitutes (as a result of broad

definition); consumer expenditure on junk food will likely not drastically decrease in the short run after a

tax is implemented. Due to these characteristics of junk foods, long-run success is determined by the

government’s ability to implement taxation strategies that effectively shift consumer preference while

balancing social and economic concerns associated with the tax.

Typical shortcomings of a “fat tax” include a targeting problem and the resulting

counter-productive producer responses and inequitable distribution. Firstly, the implementation of a fat

tax requires specific criteria for the goods affected. The development of guidelines must balance the

effects of changing public demand whilst remaining comprehensible and enforceable among producers. A

common target of legislation is the market for soft drinks. If soft drinks are too narrowly defined (eg. in

terms of sugar concentration or carbonation), producers can attempt to alter their products’ characteristics

to circumvent the effect of the tax while remaining non-beneficial in its impact on dietary health. For

example, the United Kingdom implemented the Soft Drinks Industry Levy targeted at beverages with

more than 5g of sugar per 100mL and 8g of sugar per 100mL at 18 pence per litre and 24 pence per litre

respectively (Arthur, 2018). Consequently, Coca-Cola shifted production to promote aspartame as a

substitute for sugar in Diet Coke and Coke Zero which rendered the tax ineffective in the short-run, with

Coca-Cola reporting no decline in sales. In this case, the convenient substitute allowed consumers to

replace traditional soft drinks without curbing consumer taste away from low-nutrient beverages; negating

most proposed health benefits. While the health effects of aspartame are considered less harmful than

sugar, there is an absence of consistent evidence to support the role of artificial beverage sweeteners

(ABS) in preventing weight gain and detering long term health effects. A study conducted in 2010
concerning the neurobiology of sugar addiction, however, suggests that ABSs negatively influence nerve

cells called astrocytes in their interpretation of aspartame metabolites; which in turn leads to long term

weight gain (Yang, 2010). The lack of studies surrounding long-term effects of aspartame consumption

has led to the false perception that beverage corporations are striving to become healthier, but in truth,

scientific ambiguity is providing an opportunity to shift public image and reinforce unhealthy diets.

Additionally, soft drink corporations such as Coca-Cola sponsor many healthy living initiatives (eg.

sports teams) to sway public opinion of their health stances. Another concern when implementing a

homogeneous tax is the difficulty in addressing heterogeneity of a population both in terms of dietary

necessities and income. If “junk food” is defined by high-calorie ingredients, then foods meant to boost

energy in athletes such as Clif Bars are subject to the tax, but are beneficial to this select group of

individuals. A more prominent example of the difficulty of addressing population heterogeneity is the

case of income disproportionality. A common concern, is the potentially regressive effect of

implementing a fat tax. Low-income households spend a greater proportion of their disposable income on

foods, thus a tax that broadly raises food prices will impact these consumers the most. A study conducted

surrounding food energy prices among 20 Edmonton supermarkets for 56 food items outlines the price

disparity between low and high nutrient foods (Cash and Lacanilao, 2007). ​Appendix C​ shows the price

per energy unit of vegetables was found to be $12.36 CND/ 1000 KCal compared to the price of

processed foods predominantly containing fats, sugars and oils was $1.42 CND/ 1000 KCal (Cash and

Lacanilao, 2007). Low income families will likely prioritize satisfying basic energy needs before

addressing nutritional concerns, due to the monetary pressure imposed by the vast difference in food

energy prices. Therefore, in this scenario, increasing food prices of calorie-dense foods is likely to have a

regressive effect on the economy. Another study analysing the UK National Food Survey examines the

variance in nutrient intake between individuals across the income spectrum. The conclusions of the study

suggest that a tax placed on sodium, cholesterol and fat rich foods will have an effective tax rate of 0.7%
for low-income, 0.25% for middle-income and only 0.1% for high-income families ​(​Leicester and

Windmeijer, 2004)​. As made evident by various studies, the potentially counterproductive response of

producers and the regressive effect a fat tax could have on an economy outlines the necessity for specific

guidelines to be set around taxed foods. The difficulties associated with targeting foods demonstrates the

requirement for supplementing the tax with public education, subsidized high nutrient foods, and

incentives for producers to shift supply towards healthier alternatives.

As presented by previous studies, the effectiveness of junk food taxes are greatly hindered by

their regressive effect on the economy and the potential counter-productive responses of corporations.

Subsequently, this proves a necessity for supplementary government action. A common policy that has

been implemented in many parts of the world including Canada, involves calorie labels. On January 1st

2017, all restaurants with 20 or more locations in Ontario had to display a calorie count for each menu

option. This policy was implemented in effort to increase awareness of mindful consumption and

redistribute a portion of the responsibility of public health awareness to corporations. However, a study

conducted in 2015 examined and summarized the outcomes of 31 different studies which identified the

effectiveness of calorie labeling at the point of purchase. The study found certain demographics were

more likely to use calorie information while making meal selections such as residents of wealthier

neighbourhoods who can better afford the higher price associated with healthier alternatives ​(​Kiszko,

Martinez, Abrams and Elbel, 2014)​. Generally, however, these labels had no overall impact on

consumption as people choose food items and not the component macronutrients or calories since, at the

point of purchase, consumers make food selections based on utility and not macronutrients or calorie

intake. Close parallels can be drawn between the effectiveness of government intervention through

smoking cessation programs and mindful food consumption education. For example, both markets face

relatively inelastic demand curves due to their addictive nature. Thus, taxation in both markets does little
to stem overconsumption requiring the implementation of additional government programs. A study

conducted examined the effect of smoking deterrence programs in communities with low income and

education levels. The result demonstrated that smokers with low income levels less often recalled ads

focused on how to quit, and perceived them as less effective than ads using graphic imagery or personal

testimonials to convey why to quit (Niederdeppe, et. al. 2011). Due to similar characteristics between both

goods, government action in the form of advertisements containing graphic imagery and personal

testimonials of the potential individual costs of an obese lifestyle should be considered. As previously

discussed, taxation of junk foods must be accompanied by more affordable prices for nutrient-rich foods,

to deter its regressive effect. However, Canada’s Food Price Report 2019 predicts that meat prices will

drop up to 3% while the price of vegetables and fruits will see a rise of 6% and 3% respectively (Noakes,

2018). A study conducted in 2016 examines the relation between meat consumption and global obesity

rates. The study states that, ceteris paribus, meat consumption contributed to 13% of global obesity rates

annually and sugar contributed another 13% (​University of Adelaide, 2016)​. The regressive effect which a

junk food tax has on the economy is further amplified by the lack of asymmetry between junk food prices

and nutrient rich food prices, which would further contribute to increased obesity rates. The tax revenues

gained through implementation of a fat tax should be invested in subsidies for producers of nutrient rich

foods. The resulting asymmetry between prices will shift consumer demand from junk foods to healthier

alternatives. Evidently, by drawing parallels between different markets, we can conclude that a fat tax

may be effective if supplemented with education including graphic imagery and personal testimony, along

with reinvestment of government tax revenues in subsidy programs for producers of nutrient rich foods.

In conclusion, as the individual-level challenges and aggregate-level consequences of obesity continue to

rise, the immediate need for comprehensive and cohesive policies in regulating unhealthy foods is

realized. The overconsumption of junk foods results in market failure in the form of negative externalities,
in which case government intervention is both justified and required to eliminate the welfare loss to

society. However, simply introducing a broadly defined tax could have detrimental effects on the

economy due to targeting problems, counterproductive producer responses and the regressive nature of

the tax itself. In drawing parallels between markets for different addictive goods and junk foods, it is

realized that government intervention need not only involve tax implementation but a variety of

educational and subsidy related policies to offset the implications and supplement the fat tax.
Appendix A

Diagram representing theoretical impact of implementing an ad valorem tax on the market for
sugar sweetened beverages to negate the effects of the associated negative externality in
consumption.
Appendix B

Diagram displaying the likely effect of implementing a fat tax on the market for sugar sweetened
beverages on consumer and producer tax incidences.
Appendix C

Diagram retrieved from Cash and Lacanilao 2007 study - Taxing Food to Improve Health
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