The Failure of Fat Tax in Denmark: An Analysis of Negative Consumption Externality

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Several countries today have implemented a tax on unhealthy food to combat obesity and
other health related problem. In today’ world, the consumption habit of people has shifted from
traditional food to unhealthy fast food containing huge amount fat. The consumption of these
food entail a negative externality in form of different diseases and associated health cost. In the
presence of negative externality, the functioning of demand and supply fails to ensure efficient
outcome. The negative consumption externality ends up with an overconsumption of unhealthy
food. To correct the externality a market based policy tool is Pigouvian taxation. With
implementation of taxes government aims to reduce consumption of healthy foods and ensure
efficient outcome. A pioneering nation that implement a fat tax is Denmark (Alston and Okrent
2017). Denmark however has failed to achieve the intended objective of tax. The benefit of
reduced consumption was more than offset by other unintended costs. Hence, the tax was
abolished within 15 months from its introduction.
In response to the worldwide problem of obesity and overweight and resulted increase in
the health expenditure become a major cause of concern for government. This makes
government and public authorities to intervene in the market to incentivize heathy food habit or
discourage unhealthy food habits in order to control body weight. In particular, government aims
to prevent people from too much intake of fatty food by imposing a tax on unhealthy food. A fat
tax signifies a tax that is levied on fattening food or beverages with the objective of reducing
consumption of food items that are related to obesity or other health risk. In 2011, Denmark
imposed a fat tax on butter, milk, pizzas, cheese, oil, meet and processed food products with the
benchmark that the product contains more than 2.3% of the saturated fat (Vallgarda, Holm and
Jensen 2015). The rationale for levying food tax was simple. The basic economic rationale is to
make unhealthy fatty food more expensive relative to healthy foods. Following simple law of

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demand, the high price induces people to shift their consumption habit from unhealthy to healthy
food habit. The imposition of tax becomes crucial as it is evident that the unhealthy of fatty food
comes at a lower cost as compared to fresh products and meat. Government in different nations
thus call for a tax on fatty products. Government hopes that in response to tax people tend to
change their dietary habits which in turn help to improve health condition of the society (Poppitt
2017). Researchers have found that current epidemic of obesity is expanding fast due to
expansion of food industry. The Junk outlets are spreading at a fast rate contributing to a change
in dietary habits that lead to a detrimental effect on health. Taxes in addition to reducing
consumption on unhealthy food provides an additional source of government revenue.
Under free market condition the demand and supply side forces lead to a stable market
equilibrium. The demand here reflects the marginal social benefits while supply reflect the
marginal social cost. At equilibrium, as marginal social benefit coincides with marginal social
cost the socially efficient outcome is achieved. However, in presence of any external effect the
demand and supply curve do fails to represents the true social benefit or cost (McKenzie and Lee
2016). Hence, free market equilibrium deviates from socially efficient outcome. This is
described as the situation of market failure. Presence of externality is one primary reasons for
market failure. Externality is defined as a spill-over effect generated from either production and
consumption activity and affect a third party not involved in production or consumption. The
positive external effect is termed as positive externality while the negative effect is termed as
negative externality.
A negative consumption externality is present when consumption of something imposes
an additional cost on society. Consumption of unsaturated fat has the consequence of raising
calorie intake and results in various diseases (Jensen et al. 2016). With too much intake of such