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Shayaan Al-Asmi

Should the government tax goods that are unhealthy?

Updated: Nov 14

A Nudge In The Right Direction

 

Obesity is at an all-time high. With unhealthy food more available than ever, obesity has expeditiously become a burden to the NHS’ limited budget, costing £6 billion annually, a figure set to rise to £9.7 billion by 2050 (Department of Health and Social Care, 2022). Change must be implemented to alleviate the stress felt on the NHS and taxes appear to be an attractive solution but are they truly the most effective? This essay will evaluate whether taxing unhealthy goods is an effective solution to the growing obesity problem in the UK, outlining issues with the proposed solution and exploring a more practical alternative.

 

The case for using taxes lies in their ability to reduce demand, as a rational consumer is less likely to purchase a product if its price has increased, provided demand is elastic. The strength of this approach is clear when the demand of unhealthy foods is investigated, a study found that demand for unhealthy foods is largely elastic for the majority of the population (Andreyeva et al, 2010). The main benefit of this is the lack of a need for a large tax, as a small to moderate tax will greatly decrease demand whilst still being easy to implement, unlike large taxes which are often met with public unpopularity.

 

This idea has a clear problem. Whilst demand for unhealthy goods in the case of the vast majority is elastic, the opposite can be said for demand amongst individuals who are obese (Franck et al, 2013). This likely stems from habit formation through frequent snacking and overeating (Moschonis et al, 2023), consequently reducing the likelihood of response to price changes. Moreover, utilising taxes may be regressive, as whilst it would not affect the finances of obese individuals who are wealthy, it could lead to a significant loss of wealth for those living in poverty. As over 35% of people living in the UK’s most deprived areas are obese, the impact of this would be severe (GOV.UK, 2024).

 

A viable alternative to taxes may lie in Nudge Theory. Nudges are defined as small changes in the environment which influence behaviour of individuals (Sulaimon Olaniyonu, 2021). In contrast to taxes, the effectiveness of nudges is not tied directly to elasticity, as nudges aim to change the behaviour of individuals by optimising other choices, breaking habits. A clear example of the effectiveness of nudges is the cigarette market, which shares a comparable elasticity to unhealthy foods amongst addicted individuals, due to habit formation in a similar manner. The implementation of nudges in the cigarette market both increased the likelihood of quitting by 7.5% and reduced demand for the good by 14%, exhibiting the same effect as a 28% tax (List et al, 2023). If nudges were to achieve the same results for unhealthy food, they would reduce obesity by a figure comparable to a tax which is likely to be met with resistance. 

 

Food packaging plays an important role in consumer decision making. This is clear when looking at unhealthy goods marketed towards children, as consumers are more likely to buy products with bright colours due to association with fun (Lavriša et al, 2019). The use of cartoon characters also builds long term brand loyalty, as characters are recognisable to small children. Hence, to encourage consumers to buy healthier goods, companies should be limited with their design choices using mandates, changing designs to be plain and packaging to be more ordinary. 

 

Image and text health warnings may also be effective, as the use of negative emotions has proven to be highly influential in stopping use of goods such as cigarettes. Support for health warnings seems to be strong, a study comparing health warnings to taxes found that 66% of participants strongly favoured the implementation of warning labels. Furthermore, the use of both plain packaging and warning labels had a significantly larger impact on likelihood of purchase than that of a 20% tax for sugar sweetened beverages (Bollard et al, 2016). As for potential health warnings, the most effective warnings seem to be regarding cancer (Pechey et al, 2020), as studies show that they elicit the highest levels of negative emotional response towards the product. Graphic warning labels are not likely to be met with public acceptance as children may be exposed to graphic imagery, and therefore text health warnings may be a more practical solution.

 

To move forward, there are several considerations for policymakers. As demand for unhealthy goods is generally elastic, policymakers should consider taxation if their aim is to prevent the rise of obesity. Alternatively, if their aim is to reduce the prevalence of obesity, nudges should be implemented through mandates, forcing companies to use plain packaging and health warnings. Therefore, to impact the entirety of the population, the government should utilise both taxes and nudges.


Shayaan Al-Asmi is a student at The Sixth Form Bolton, and was one of our five finalists of the Young Economist of the Year competition 2024.


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