How can government intervene in food markets?

Originally published in Economic Review magazine which provides articles to make recent academic research accessible for A-level students, apply economic theory to real-world situations and sharpen students’ skills.

Obesity in the UK is on the rise. In 2019, 28% of adults in England were obese – almost double the share in 1993 – with the rate among children also increasing over the period. Obesity can have serious health consequences, meaning these high rates are a serious problem for everyone: they lead to reduced productivity, a strained NHS and – perhaps most importantly – shorter and unhappier lives for us. Unsurprisingly then, over the last decade the government has proposed and implemented a plethora of policies aiming to improve dietary choices. But why might the government be justified in trying to influence what we eat, and how effective have these interventions b​​een? 

Why might the government want to influence what we eat?

It’s unclear whether the government should try to influence our food choices at all. After all, they are choices. It generally seems sensible to assume that we know our preferences better than the government does, and provided we’re not harming anyone else, shouldn’t we be able to eat what we want? ​​Perhaps it’s the case that we just really love ice cream sandwiches, and are willing to deal with the associated health risks. This reasoning is reflective of how economists generally think about markets which are functioning efficiently; in such case​​s, letting markets function freely, with the forces of supply and demand determining who eats (and pays) what, leads to the socially optimal outcome.

That said, a free market will not deliver a socially optimal allocation of resources if there are market failures. The government can then be justified in intervening if it can bring society closer to the optimal allocation. There are a couple of reasons to suspect the existence of market failures in the market for food.  

One example is the presence of negative externalities. Consuming unhealthy foods, like anything else, has costs and benefits. Individuals get pleasure and calories from these foods, but they must pay a price for them. What sets unhealthy foods apart from other goods is that whilst the benefits of consumption accrue entirely to the individual eating them, the costs accrue both personally (through the monetary and potentially health costs) and to the rest of society, as individuals with poor diets are less productive and more likely to use public health services that we all pay for. If people’s decisions on what to eat only depend on their (perceived) personal costs and benefits, they will consume more unhealthy food than in the socially optimal outcome.

Another is if people systematically undervalue the personal costs of eating unhealthy foods at the point of consumption due to systematic cognitive biases. This can occur because the benefits of consuming unhealthy foods are felt immediately, but the costs (in terms of health risks) are only felt down the line, when we wind up in hospital due to high cholesterol levels. If people are short-sighted and undervalue these long-term health risks, this will again result in the overconsumption of junk food.  

A role for corrective taxes

So, given the prevalence of these market failures, it seems the government may be justified in trying to influence what we eat. But how can it do so? One option is the use of corrective taxes.  

By imposing taxes on the production or consumption of unhealthy foods, the government primarily seeks to increase their price relative to healthier alternatives. As junk food becomes more expensive in relative terms, people would (all else equal) be expected to substitute towards ​​more nutritious options, leading to healthier – and more efficient – consumption behaviour. What’s more, economics tells us precisely how to set these taxes; set a rate equal to the difference between the social and personal cost of consumption. Such a tax forces individuals to internalise the costs they impose on others through their consumption, as well as increasing the costs that accrue immediately, thus shifting consumption to the socially efficient level. (Determining the size of the externality in practice, however, is a lot less straightforward.)

Corrective taxes aren’t without their flaws. One concern is that individuals need to be sufficiently price-sensitive for taxes to change behaviour, which may be unlikely with ‘addictive’ goods. Equally, corrective taxes can be regressive – if unhealthy foods make up a greater share of poorer household’s expenditure, these taxes will hit poorer people the hardest.  Nonetheless, the government has other means of offsetting this regressivity, for example by redistributing tax revenues through the benefits system. 

Sweetening the deal: the Soft Drinks Industry Levy

Let’s now turn to a concrete policy example. Across the board, people in the UK consume significantly more added sugar than the recommended maximum. Children and adolescents are a particular concern, on average consuming over double the medically recommended level.

A common way of consuming sugars is through soft drinks, such as Coke, Pepsi and Red Bull. This is particularly true for adolescents with the highest sugar consumption, who get over a third of their added sugar from these beverages. Guided by this, in 2016 George Osborne (then Chancellor of the Exchequer) announced the Soft Drinks Industry Levy (SDIL)¸ colloquially referred to as the ‘sugar tax’.    

It's worth detailing the specifics of the policy, to highlight the economic forces at play. Following the SDIL, manufacturers of soft drinks would need to pay a levy to HMRC, with the rate of tax depending on the sugar content of the drink. For drinks with less than 5g of sugar per 100ml, the rate was zero. For drinks with between 5g and 8g of sugar per 100ml, the rate was 18p per litre. This rose to 24p per litre on soft drinks with more than 8g of sugar. 

How effective was it?

The SDIL sought to correct the overconsumption of sugary drinks. But did it work?

Well, the policy seems to have had important supply side effects, with some firms responding to the SDIL by reformulating their products. Prior to 2016, a large share of drinks had more than 8g of sugar per 100g, with a mass point around 10g per 100ml. Following the introduction of the SDIL, we see a shift towards lower sugar intensity in soft drinks, with many drinks having just under 5g or 8g of sugar per 100g.  Indeed, this was an explicit aim of the policy: the government hoped that by setting thresholds intelligently (using detailed knowledge about the industry and feasibility of reformulation), firms would be incentivised to reduce the sugar content of their products by just enough to sit under the threshold, without compromising too much on flavour.

However, not all firms reduced the sugar content of their products. Some manufacturers felt consumers would be strongly against reformulation and were either willing to absorb the increased cost imposed by the tax (reducing their profit margins) or pass this onto consumers in the form of higher prices. In fact, research suggests that much of the costs were passed on, as there were large increases in price for non-reformulated (high levy) drinks. As we’d expect, purchases of these high levy drinks fell in response to these price rises, as consumers substituted away to relatively cheaper alternatives.

Why were some firms willing to hike their prices, whilst others chose to reformulate? Well, market power is likely to be at least a part of the story. Take Coca-Cola for example, who chose not to reformulate (a can of Coke contains 10.6g of sugar per 100g, for reference). A combination of effective marketing, historical significance (the price of a Coke didn’t increase for 70 years!) and arguably great taste (I’m more of a Fanta man myself) mean that many consumers are quite insensitive to increases in the price of Coke. Of course, executives at Coke knew this, and opted against reformulation accordingly.

So the SDIL led to an overall reduction in sugar consumption, partially because firms reformulated their products, but also because individuals switched away from the most sugary drinks as their relative prices rose. An important question is how well targeted the tax was – that is, who exactly reduced their consumption? Was it individuals who, prior to the tax, were weighing costs and benefits effectively and consuming a socially optimal level of these drinks? Or was it individuals who, prior to the tax, were vastly overconsuming these drinks? Research suggests that the tax was well targeted at the young people we mentioned before, because these individuals tend to be very responsive to price increases (and therefore reduced their sugar intake following the SDIL). In contrast, adults with high sugar intakes prior to the SDIL didn’t reduce their consumption much following the tax, as they were willing to pay higher prices to continue buying the most sugary drinks. This suggests that whilst corrective taxes were effective in changing the behaviour of some key offenders, they aren’t a panacea.  

A menu of alternative policy options

The Soft Drinks Industry Levy teaches us that well-designed corrective taxes can be effective in changing the behaviour of both consumers and firms. However, these taxes aren’t a silver bullet – often, the main targets of these policies are the least willing to change their behaviour in response to them.  

Corrective taxes aren’t the only tool in the government’s arsenal, however. Instead of using relative price changes to incentivise more efficient behaviour, the government can also try and directly influence people’s preferences for healthy and unhealthy foods. It can do this by running educational campaigns, like the Five-a-day or Change4Life schemes, or by regulating the content and timing of advertisements. For example, the government is banning TV adverts for ‘high fat, sugar or salt’ products before 9pm, with the restrictions expected to come into place in 2025. It can also provide direct support to households to improve nutritional choices, with the ‘Healthy Start’ voucher scheme and ‘Free School Meals’ programme constituting notable examples.

Ultimately though, a combination of these tools is likely to be needed to improve nutritional choices in practice. By designing a carefully selected smorgasbord of policies, the government can ensure there’s something for everyone’s taste on the policy menu.