Impact of Fat-Tax Assignment PDF
Added on 2021-06-15
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Running head: ECONOMICSImpact of Fat-TaxName of the Student:Name of the University:Author note:
1ECONOMICSIntroductionFat-tax is a direct tax or surcharge that the government places upon the foods, consideredto be fattening and unhealthy. The aim of this tax is to discourage the consumption of unhealthyand fattening diet and reduce the incidence of obesity among the people (Smed 2012). The junkfoods and sweets, containing high amount of saturated fat and sugar are the target for this tax. InOctober 2011, Denmark introduced fat-tax, first time in the world on fattening milk, butter,cheese, oil, meat, pizza and processed food items with more than 2.3% saturated food (BBCNews 2011). However, in November 2012, the tax was abolished as it was not a successfulmeasure to improve the health conditions of the citizens. The essay will highlight theimplications of fat-tax, in terms of externalities, advantages, disadvantages and the reasons for itsfailure in Denmark. Discussion Externality of fat-tax Taxes are imposed by governments to earn revenues and in some cases, to discourageconsumption of any product or service, if that is perceived to be harmful. Taxes reduce both thedemand and supply and results in a combination of a price and quantity, in which price is higherthan that without tax, and quantity is lower than without tax. Hence, taxes have impact on freemarket equilibrium (Stiglitz and Rosengard 2015). An externality is a consequence of aneconomic activity, which leads to inefficient market equilibrium as the equilibrium price doesnot reflect the true benefits and costs of the product or service being produced (Farhi and Gabaix2015). Externalities are of two types, positive and negative. Positive externality refers to the
2ECONOMICSbenefit enjoyed by the third party due to an economic transaction and negative externality is thecost, borne by the third party from an economic transaction (Jarrow and Larsson 2012). To returnto the efficient market equilibrium, the government imposes tax on negative externalities. The fat tax is a measure the curb the negative externality resulted from fattening food.Foods with high level of saturated fat and sugar, such as, the junk food, desserts etc. and low innutritional value are harmful for the people. As they consume much of these foods, they grow atendency of obesity and unhealthy life. It has a social cost. The increasing incidence of obesityand many more diseases, such as, heart diseases, diabetes, cancer and bone disorders are a matterof concern for any society. It is found that, an obese person annually spends around $700 morethan that of a normal person for medical purpose in the USA (Economist.com, 2012). Whenthese costs are shared, it is a burden for everyone in the society including the government. It notonly affects the healthcare of the society, the economic productivity of the nation or the societyalso gets hampered. Hence, to reduce the impact of the externalities from fattening foods andsugary beverages, a fat-tax could be imposed by the government, which would raise the personaland social marginal cost more than the benefit and discourage in production and consumption ofthose food (Posner 2014).
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