In 2011, Danish leaders formulated the fat tax policy which they perceived was vital in ensuring that people live healthily by reducing the consumption of junk foods.[1] The Denmark's fat tax which targeted commodities that have a fat saturation above 2.3 % served to reduce the consumption of fatty foods which have adverse health effects such as increased serum cholesterol and enhanced risks of developing coronary infections.[2]
However, the fat tax which Denmark formulated did not attain its goal of reducing consumption and the Danish authorities to abolish the policy in 2012.[3] Taxation, as a way of curbing negative consumption externalities, as in the case of Danish fat tax, has some merits on the citizens' health but leads to inefficiencies in allocation of resources which adversely affects the economy of a nation thus leading to the abolition of the policies.
Market Failure
Consumption externality involves a scenario whereby a transaction has significant impacts on a third party either positively or negatively.[4]
In a market, people exchange goods for money and use the product that they buy for various purposes (majorly for consumption); however, in the course of using the commodities that consumer purchase, some effects spill over to the other parties, who are majorly not directly involved in the transaction process. Therefore, the adverse effects of a transaction on a third party are negative consumption externalities. The institution of punitive tax policies leads to a shortage of a commodity hence making consumes to consume its substitute.[5] Notably, the initial consumers of a product will shift to similar commodities as the ones they were initially consuming thus the collapse of a given production firm which also results to a deterioration in the revenues that a government receives through taxes.
Scientists opine that substantial consumption of saturated fats leads to contraction of infections such as diabetes.[6]
However, in an industry, laborers are critical in the cause of production hence consumption of saturated fats will lead to obesity which will adversely affect the productivity of workers thereby reducing the revenues that employers generate from their operations. A skewed allocation of finances that a government has is a violation of the economics of welfare and Pareto efficiency (the effective application of taxation process to benefit society members fairly ).[7]
Consequently, the attempts by government to rectify an externality through taxation is a challenging strategy.
Economists argue that in negative consumption externalities, the social marginal benefit (SMB) is lower than the private marginal benefit (PMB) of consuming a given commodity.[8] For instance, the use of a given consumer good adversely affects the welfare of a society at a greater extend compared to the benefits that the commodity has on the personalities who consume the item. The diagram below elucidates the negative externalities of consuming saturated fats.
Negative Externalities of Consuming Saturated Fats
Price
S- Marginal social cost
P1 Potential Welfare Loss
Po Negative Externality
Marginal Private Benefit (MPB)
Marginal social benefit (MSB)
Qo Q1 Quantity of saturated fat consumed
Fig. 1
As evident in Fig. 1 above, a negative consumption externality which results from the consumption of saturated fat, the marginal private benefit is not equal to (greater than) the marginal social benefit of consuming the fatty foods. Consequently, the Marginal social benefit of consumption of saturated fats lies below the MPB which is an indication that the fatty foods adversely affect the welfare of society compared to the manner in which individuals benefit from the food product. Indeed, the vertical difference between the MPB and MSB (as in Fig.1 above) is negative consumption externality for consumption of saturated fats in a given community. Ceteris paribus, the optimal level of consumption of saturated fats is where MPB=MSB; however, in the case of Denmark, the citizens' consumption had surpassed the equilibrium point (represented by MSB=MPB) hence posing negative effects on the efficiency of government's allocation of resources and improve the welfare of community members equally.
Advantages of Fat Tax
Danish fat tax served as a vital way towards achieving a higher average life expectancy among individuals in the Danish society. In particular fat tax would be critical because the saturated fats are often associated with cancer and cardiovascular disease. Therefore, imposing the tax on saturated fats would result in higher prices for the fats, which was seen as an effective way of reducing the consumption of fatty foods.[9] It would also encourage individuals to adopt healthier diet which lead to better health and also help reduce the prevalence of diseases related to the fats. Decreased incidences of diseases, such as cancer, cardiovascular diseases, and obesity would in turn result in lower healthcare costs is the country. Fat tax would also help the government to raise additional cash through revenue. The government may use the revenue to fund other important programs, for example to finance healthcare.
Fat tax can also be compared to Pigouvian tax because it is a tax on a harmful market activity which generates negative externalities to the society. In this case of saturated fat produces negative externalities in that the consumption of saturated fat leads to health problems among individuals in the society and the cost of healthcare is not factored in the production of the fats. Negative externalities often prevent the market economy from attaining equilibrium when the producers fail to internalize all the production cost.[10] In such situations, the people, society, and the environment alike, bear most of the costs related to that particular economic activity. Therefore, fat taxes, just like Pigouvian taxes, would discourage individuals and entities from engaging in activities that may produce the negative externalities.
Disadvantage of Fat Tax
Danish fat tax significantly demotivated producers who complained bitterly hence the decision to scrap the policy.[11]
The imposition of a 2.3% tax on products that manufacturers developed led to a significant decline in the revenues which companies received from their operation hence forcing the Danish leaders to repeal the fat tax law. Also, the policy on saturated fat led to an increase in unemployment because a majority of firms resorted to laying off some of their employees as a way of reducing the cost of production.[12]
The decision to lay off some workers was detrimental to the Danish government's approaches to solving unemployment challenges hence leading to the decision to scrap the tax on saturated fat. Besides, the structure of Danish fat tax made it unfair thus making it regressive and discouraging to the hard-working individuals in the society. The rigidity of various provisions of Danish fat tax significantly reduced its applicability in solving problems which resulted from unhealthy eating habits of the citizens hence the policy’s failure to attain its goals. The various challenges that emerged from imposition of taxes on saturated fats and the policy's regressive nature led to its abolition.
Brief Overall Evaluation
Danish government's decision to introduce fat tax played a significant role in curbing the externality of unhealthy eating habits, but the primary disadvantages of the policy was an increase in unemployment and high commodity prices which adversely affected welfare of the society members hence the abolition of the tax.
Conclusion
Taxation, as a way of curbing negative consumption externalities, as in the case of Danish fat tax, has some merits on the citizens' health but leads to inefficiencies in allocation of resources which adversely affects the economy of a nation thus leading to the abolition of the policies. As evident in this essay, taxation, as a way of curbing negative consumption externalities adversely affects the Pareto efficiency in allocating government resources hence a collapse of a market. Therefore, inefficiency and various rigidities in Danish fat tax were the precursor of its failure to attain goals of improving citizens’ welfare.
Bibliography
Anderson, Beth, Sarah Lyon-Callo, Christopher Fussman, Gwendoline Imes, and Ann P. Rafferty. "Peer reviewed: Fast-food consumption and obesity among Michigan adults." Preventing chronic disease 8, no. 4 (2011). https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3136980/
Barrington-Leigh, Christopher. "Consumption externalities." Encyclopedia of Quality of Life and Well-Being Research (2014): 1248-1252.
Bødker, Malene, Charlotta Pisinger, Ulla Toft, and Torben Jørgensen. "The rise and fall of the world's first fat tax." Health policy 119, no. 6 (2015): 737-742.
Cornelsen, Laura, Rosemary Green, Alan Dangour, and Richard Smith. "Why fat taxes won't make us thin." Journal of public health 37, no. 1 (2014).
Fitzgerald, M. Paula, Cait Poynor Lamberton, and Michael F. Walsh. "Will I Pay for Your Pleasure? Consumers’ Perceptions of Negative Externalities and Responses to Pigovian Taxes." Journal of the Association for Consumer Research 1.3 (2016): 355-377.
Gans, Joshua S., Stephen P. King, and N. Gregory Mankiw. 2011. Principles of microeconomics. South Melbourne, Vic: Cengage Learning.
Gillum, Leslie A., Christopher Gouveia, E. Ray Dorsey, Mark Pletcher, Colin D. Mathers, Charles E. McCulloch, and S. Claiborne Johnston. "NIH disease funding levels and burden of disease." PloS one 6, no. 2 (2011): e16837. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3044706/
Kliff, Sarah. 2012, Nov. 13th. “Denmark scraps world’s first fat tax.” Washington Post. https://www.washingtonpost.com/news/wonk/wp/2012/11/13/denmark-scraps- worlds-first-fat-tax/?noredirect=on"utm_term=.d5bd0d767e4e
Petkantchin, Valentin. "Nutrition taxes: the costs of Denmark’s fat tax." IEM’s Economic Note (2013). http://www.institutmolinari.org/IMG/pdf/note0513_en.pdf
Pieler, George and Gers, Laurson.2012, Nov. 27th “Taxes On "Fatty Foods", And Their Unintended Consequences.” Forbes Magazine
https://www.forbes.com/sites/realspin/2012/11/27/taxes-on-fatty-foods-and-their- unintended-consequences/#5334e5fb693e
Strom, Stephanie. 2012, Nov. 12th “Fat Tax’ in Denmark Is Repealed After Criticism.” New York Times. https://www.nytimes.com/2012/11/13/business/global/fat-tax-in-denmark-is- repealed-after-criticism.html
Tian, Guoqiang, and Liyan Yang. "Theory of negative consumption externalities with applications to the economics of happiness." Economic Theory 39, no. 3 (2009): 399-424.
Wideback, Asa. 2011. Danish Fat Tax on Food. https://gain.fas.usda.gov/Recent%20GAIN%20Publications/Danish%20Fat%20Tax%20o n%20Food_Stockholm_Denmark_10-6-2011.pdf
[1] Petkantchin, Valentin. "Nutrition taxes: the costs of Denmark’s fat tax." IEM’s Economic Note (2013). http://www.institutmolinari.org/IMG/pdf/note0513_en.pdf
[2] Wideback, Asa. 2011. Danish Fat Tax on Food.
https://gain.fas.usda.gov/Recent%20GAIN%20Publications/Danish%20Fat%20Tax%20on%20Food_Stockholm_Denmark_10-6-2011.pdf
[3] Kliff, Sarah. 2012, Nov. 13th. “Denmark scraps world’s first fat tax.” Washington Post.
https://www.washingtonpost.com/news/wonk/wp/2012/11/13/denmark-scraps-worlds-first-fat-tax/?noredirect=on"utm_term=.d5bd0d767e4e
[4] Barrington-Leigh, Christopher. "Consumption externalities." Encyclopedia of Quality of Life and Well-Being Research (2014): 1248-1252.
[5] Cornelsen, Laura, Rosemary Green, Alan Dangour, and Richard Smith. "Why fat taxes won't make us thin." Journal of public health 37, no. 1 (2014).
[6] Anderson, Beth, Sarah Lyon-Callo, Christopher Fussman, Gwendoline Imes, and Ann P. Rafferty. "Peer reviewed: Fast-food consumption and obesity among Michigan adults." Preventing chronic disease 8, no. 4 (2011).
[7] Tian, Guoqiang, and Liyan Yang. "Theory of negative consumption externalities with applications to the economics of happiness." Economic Theory 39, no. 3 (2009): 399-424.
[8] Gans, Joshua S., Stephen P. King, and N. Gregory Mankiw. 2011. Principles of microeconomics. South Melbourne, Vic: Cengage Learning.
[9] Bødker, Malene, Charlotta Pisinger, Ulla Toft, and Torben Jørgensen. "The rise and fall of the world's first fat tax." Health policy 119, no. 6 (2015): 737-742.
[10] Fitzgerald, M. Paula, Cait Poynor Lamberton, and Michael F. Walsh. "Will I Pay for Your Pleasure? Consumers’ Perceptions of Negative Externalities and Responses to Pigovian Taxes." Journal of the Association for Consumer Research 1.3 (2016): 355-377.
[11] Pieler, George and Gers, Laurson.2012, Nov. 27th “Taxes on "Fatty Foods", And Their Unintended Consequences.” Forbes Magazine.p.1
[12] Strom, Stephanie. 2012, Nov. 12th “Fat Tax’ in Denmark Is Repealed After Criticism.” New York Times. p.1
