PART C: The obesity issue versus market failure mount of sugar, salt and fat. The fact is "Unhealthy food killed more people than cigarettes". (Geoff Thompson - economist) On Thursday 9th of August, there is a piece of news on pm One News program mentioned about the amount of sugar in breakfast cereal for kids. There are about 3 tablespoons of sugar per serving in many cereal types that are commonly used for kids in New Zealand family. This amount of sugar per day exceeds the amount that human bodies need. Moreover, one of these types of unhealthy foods is fast food.
Fast food companies have a huge advertisement and sponsorship to the society. They influence consumers' behavior. Using these unhealthy foods with high sugar, fat and salt make us fatter and fatter. Nowadays, obesity is a national problem rather than just individual responsibility. Obesity is not directly a market failure however the over consumption of all unhealthy food kinds has became a market failure. The costs for obesity has became a burden of New Zealand economy in recent years. Obesity is the cause of a wide range of diseases.
Obesity makes a significant reduction of life expectancy as well. Hence there is a loss in productive capacity since the labor market has decreased in quality and health. There is a reduction in the labor source of New Zealand because of the decreased health quality and life expectancy. In this particular situation, the market failure occurs because the obesity and it's related health problems cause unemployment hence productive inefficiency. The illnesses that caused by obesity make people take days of from work, some people might need to stop working to have treatment, and so on.
This leads to a decreased productivity and affect directly to the country economy. What is more, there are some obese people would be affected psychologically such as less confidence in communicating and socializing. They might not want to go to work anymore and decide to stop working and live with the low income from social welfare. The result from these situations would happen as a cycle. Low income can only afford for most of unhealthy food because they tend to be cheaper than healthy stuffs in the supermarket.
These negative results are "production externalities" because these externalities are the undesirable side effects of production - that impose costs on other people. The graph shows the social equilibrium quantity at IQ and the private market equilibrium quantity at Q*. At the private market (in this case will be understood as unhealthy food private market), the good is over produced and the price is lower. The grey shaded area is the dead weight loss (the loss of society). Unhealthy food companies produce more and more good to run their businesses.
They would Join the price competition with the low price to get more consumers. This in the society can afford it. People's diet will cheaper as well as less healthy. Low price and salty, sweet, fat flavors affect consumers' behavior to the good. They want more each time and can't stop eating these tasty unhealthy foods. Understanding of the situation as whole society, the graph 1 shows the negative externally causing the cost of production to exceed the private cost. The Marginal Social Cost curve above shows the cost that society wants to be.
The unhealthy food companies are continuing to earn super-normal profit by the advertisements, sponsorships and the taste of salt, sugar and fat that stimulate people. The actual production activities of these firms have negative to the society as I mentioned above therefore the whole society is now want a higher price and a lower quantity for demerit foods to decrease consumers spending on unhealthy food which is better for them. The market in this situation is failed because of the imperfect information. It means the demerit goods (unhealthy foods and drinks) are over-produced as well as over-consumed.
Public health care cost of New Zealand Government used for obese New Slanderer treatment is estimated to be more than $135 millions of dollars (this figure excludes health costs from chronic diseases that result from obesity). According to a research about the cost of obesity of The University of Auckland, researchers have announced the results of a recent study showing that overweight and obesity in New Zealand costs the country between NZ$722 million and NZ$849 lion a year in health care cost and lost productivity.
In the point of view of the New Zealand Government, those amount of spending for obesity and it's side effects is huge while there are a lot of other factors need to be spent by the Government rather than for obesity itself. In the graph, the Marginal Private Benefit is at the point where the quantity and the price are all higher than what the whole society wish. The impacts of any actions of firms are now impact rapidly on consumers' behavior to their product (unhealthy food). Obesity and its results lead to many negative externalities of consumption.
These are the undesirable side effects that result in the loss of welfare of other people. People who only can afford "unhealthy food" price are the low-income people. Social welfare budget of New Zealand Government comes mainly from taxation of New Slanderer. Normal and high - income citizens need to pay more for tax but they are likely to have a healthy diet and be away from lots of diseases that high risk from obesity. Overall, the social health care cost of New Zealand is used for obese New Slanderer more than others.
In the graph above, quantity and cost of the private factor are both higher than quantity and cost of the society. The shaded area in the diagram shows the dead weight loss of this particular situation. 0 Market failure occurs when freely -functioning markets, fail to deliver an efficient the market failure exists when the competitive outcome of markets is not efficient from the point of view of society as a whole. PART D: Government interventions Obesity is an indirect market failure, however it creates a wide range of negative effects to New Sealant's economy.
New Zealand Government should intervene the whole market to decrease the long-term impact of obesity. The paragraphs below present my personal ideas for the Government to correct this particular market failure. My opinions are mainly used with the price problem because it affects significantly to the behavior of the consumers. I. Remove SST from healthy food. Healthy food tend to be more expensive more than unhealthy food and meals such as McDonald or Burger King, etc. The final cost for a good includes employee salary, electricity bills, transports, taxation and so on.
Removing SST from the healthy food product such as Vegetable, nuts, quality milk, wheat, would help the price of these DOD cheaper and more people will be willing to add them in their daily diet. As a result, overall percentage of obese New Slanderer would be reduced, the social cost used for obese treatment and its related diseases decrease and New Zealand Government would be able to spend the money on others things to help increase standard of living for New Zealand citizens. In the graph below, the market situation shows a higher level of efficiency. Since removing tax leads to a shift of the supplied to the right.
The deadweight loss that created by the tax will be removed. EFFECTS: Remove SST from healthy food means that the Government encourages Ritter goods such as vegetable, nuts, rice, quality diary products, etc. Firstly, in the get from healthy food. Secondly, in terms of consumers, this policy would hurt some of the low-income people if they still can't afford for the healthy essential food for living. In the other hands, it is better for them because the risks from unhealthy life style and diet are now decreased. Healthy food producers would be able to increase their production activities because of cheaper cost.
However, the unhealthy food companies tend to be get in the downhill as the consumers start to live healthier with the food that good for them. Therefore, the market failure is now correct since the deadweight loss in the society is removed in the market of healthy food. Since people are now having a healthy diet, the life expectancy of them tends to be higher and the labor sources are now able to work more efficiently. The merit goods (healthy foods) are no more under-produced as the cheaper production cost as well as the increased demand. It.
Tax on unhealthy food Taxing unhealthy food makes the cost for unhealthy food production of some firms more expensive. As a result, the price for final product will be higher therefore, more people would not choose to use it as much as they had used before. In the graph below, there is deadweight loss appear when we put the tax on unhealthy food. The efficiency of the market is decrease because there is a loss in society while we apply this policy. The topic "It's time to tax unhealthy food" was mentioned about in The Vote program on TV, Wednesday 27th of March.
Finally, the vote for Yes answer is 54% and the vote for No is 46%. The viewpoints that agree taxing demerit goods of society are more than a half. In my opinion, the price that we need to pay for healthy food is way heaper than the cost for losing weight as well as treatment for obesity related diseases. It costs NZ$18000 to lose 20 kilos. Unhealthy food would discourage people to consume it. This does helps to fix the over-consumption issue of unhealthy food and as a result, the health care costs decreases, New Zealand life expectancy is increase in long-term future, hence the production activity is more efficient.
However, it creates a deadweight loss because the consumers and producers surpluses are both decreased. Low-income people wouldn't be able to afford the food. The standards of living of some people might come worse than it was before. PART E: Conclusion Tax unhealthy food (1) Remove SST from healthy food (2) This intervention makes the unhealthy food price goes up and this would affect both sides of producers and consumers. The low-income people might not be able to afford for their essential lives.
Increase tax on unhealthy food helps increase Government revenue, however applying this policy will make the prices in all types of foods become higher. Food is an extremely essential good for living. Therefore, the high price for food product might create a price storm and inflation. This result is not ere good for our economic growth. Current tax policy for healthy food is not perfect. Government should apply another tax policy for healthy food to change the current issue of obesity which caused mainly by unhealthy food.
Removing SST from healthy food would decrease the price of healthy food product. Moreover, a cheaper price will not hurt anyone in this case. Producers don't pay for the tax in their production costs and consumers don't share with the firms the tax that includes in price that they need to pay for. Ranking these two policies in 10-score quality, I would rank the "Tax unhealthy food" logic with 5/10 score but the "Remove SST from healthy food" with 7/10 score.
Considering with the efficiency terms, taxing unhealthy food and removing tax from healthy food help to correct the market failure and decrease the consumption of people on demerit foods (which is leads to several of positive results that I have mentioned above). On the other hand, in the inefficiency terms, the "Removing tax from healthy food" tends to be better for the society as a whole because it encourage the business of quality dairy as well as growing vegetable industries which are both promising in New Zealand.