ECON 8: Essay on the Impact, Advantages, and Disadvantages of Fat-Tax

This economics essay delves into the concept of fat taxes, examining their implications, advantages, and disadvantages through the lens of a case study on Denmark's implementation and subsequent failure of such a tax. The essay begins by defining fat taxes as a government-imposed surcharge on unhealthy foods and explores the concept of externalities, specifically negative externalities related to the consumption of high-fat and high-sugar foods. It then presents a diagram illustrating the impact of the fat tax on supply, demand, and market equilibrium. The essay then analyzes the reasons behind the failure of the fat tax in Denmark, including cross-border trading, price inelasticity of certain foods, and job losses. Furthermore, it outlines the potential benefits, such as reduced social costs of obesity and healthier eating habits, and disadvantages, such as challenges in selecting taxable foods and the regressive nature of the tax. The essay concludes by summarizing the key findings and reiterating the complexities surrounding fat taxes as a policy instrument.

Running head: ECONOMICS
Impact of Fat-Tax
Name of the Student:
Name of the University:
Author note:

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Introduction
Fat-tax is a direct tax or surcharge that the government places upon the foods, considered
to be fattening and unhealthy. The aim of this tax is to discourage the consumption of unhealthy
and fattening diet and reduce the incidence of obesity among the people (Smed 2012). The junk
foods and sweets, containing high amount of saturated fat and sugar are the target for this tax. In
October 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 (BBC
News 2011). However, in November 2012, the tax was abolished as it was not a successful
measure to improve the health conditions of the citizens. The essay will highlight the
implications of fat-tax, in terms of externalities, advantages, disadvantages and the reasons for its
failure in Denmark.
Discussion
Externality of fat-tax
Taxes are imposed by governments to earn revenues and in some cases, to discourage
consumption of any product or service, if that is perceived to be harmful. Taxes reduce both the
demand and supply and results in a combination of a price and quantity, in which price is higher
than that without tax, and quantity is lower than without tax. Hence, taxes have impact on free
market equilibrium (Stiglitz and Rosengard 2015). An externality is a consequence of an
economic activity, which leads to inefficient market equilibrium as the equilibrium price does
not reflect the true benefits and costs of the product or service being produced (Farhi and Gabaix
2015). Externalities are of two types, positive and negative. Positive externality refers to the

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benefit enjoyed by the third party due to an economic transaction and negative externality is the
cost, borne by the third party from an economic transaction (Jarrow and Larsson 2012). To return
to 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 in
nutritional value are harmful for the people. As they consume much of these foods, they grow a
tendency of obesity and unhealthy life. It has a social cost. The increasing incidence of obesity
and many more diseases, such as, heart diseases, diabetes, cancer and bone disorders are a matter
of concern for any society. It is found that, an obese person annually spends around $700 more
than that of a normal person for medical purpose in the USA (Economist.com, 2012). When
these costs are shared, it is a burden for everyone in the society including the government. It not
only affects the healthcare of the society, the economic productivity of the nation or the society
also gets hampered. Hence, to reduce the impact of the externalities from fattening foods and
sugary beverages, a fat-tax could be imposed by the government, which would raise the personal
and social marginal cost more than the benefit and discourage in production and consumption of
those food (Posner 2014).

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S1=PMC (With no
fat–tax)
S2=SMC (With fat-tax)
D = PMB = SMB
E*
E’
Q*
P*
P’
Q’
P0 E0
T
Price
Quantity
Figure 1: Impact of Fat-tax
(Source: Author)
In the diagram above, the impact of fat-tax is illustrated. The social marginal cost (SMC)
for fatty food is always higher than the private marginal cost (PMC) due to cost of production,
shown by S2 and S1 respectively. The demand for fatty food is shown by D, where private
marginal benefit (PMB) equals social marginal benefit (SMB). Without the fat-tax, the supply of
fatty food is S1, representing the private marginal cost (PMC) and the equilibrium is at E*. The
corresponding equilibrium price is P* and quantity is Q*. With the imposition of fat-tax, the
supply curve for the fatty food shifts to the left to S2, representing the social marginal cost
(SMC) by the amount of the tax, T. As a result, price of the fatty food increases by the tax
amount, from P* to P’, and this leads to a fall in the demand for the fatty foods. This is reflected
by the upward shift of the market equilibrium from E* to E’ and the equilibrium quantity falls to

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Q’ from Q*. In this case, the consumers pay the price P’ and the producers get P0. The
difference between P’ and P0 is the tax amount, T, which is earned by the government. Hence,
the triangle E’E*E0 represents deadweight loss. Thus, a fat-tax is expected to reduce the
production and consumption of fatty food, which increases social benefits.
Reasons for fat-tax failure in Denmark
The government of Denmark introduced the fat-tax with an aim to reduce the production
and consumption of fattening food. It was imposed on food items containing more than 2.3%
saturated fat and high level of sucrose. The main purpose of the tax was to change the eating
habits of the Danes’ and encourage them to adopt a healthier and long life. The tax raised the
prices of unhealthy fattening foods more than the market equilibrium price and created an
inefficient equilibrium (Bødker et al. 2015). However, within a year, the Denmark government
abolished the tax and stated that they would try to improve the public health in other ways. There
are many reasons for the failure of this tax. Those are as follows.
 The tax encouraged cross border trading. The Danes started buying lower cost
alternatives from other countries, such as, Sweden or Germany, where prices were 20%
less than that in Denmark. Majority of the Danes did not change their food habit; rather
they changed their shopping market. This had affected the domestic Danish market quite
negatively as their business fell as demand for domestic products fell due to availability
of cheaper imported substitutes (Kliff 2012).
 Majority of the food items, such as, butter, bacon, etc are price inelastic. A mere tax
would not make much difference for staple food consumption.

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 The fall in the revenue of the local producers created issues in the employment market as
many Danish lost their jobs (Stafford 2012). It also created bureaucratic problems in the
nation from the food producers.
Potential benefits and disadvantages of fat-tax
The fat-tax is aimed to achieve greater social benefits from healthier eating habits of the
population, thereby having healthy generations, greater productivity, and greater longevity and
reduced medical expenses. On the other hand, critics say that fat-tax is regressive in nature,
which will cost more to the lower income groups, who are more price sensitive than the higher
income groups (Moodie et al. 2013).
The potential advantages of fat-tax are:
 It reduces the social cost of being unhealthy or obese. Obesity costs a significant amount
to the society in terms of diseases, like heart diseases, diabetes, angina, cardiac attacks
and premature deaths. It also leads to loss of productivity at work and loss of revenues for
the organizations. Hence, a tax on the unhealthy foods results in paying social cost and
achieving reduction in obesity and more efficient resource allocation (Moodie et al.
2013).
 It encourages healthier diet among the population. This pushes the food producer to
innovate new foods with lower fat and sugar, promoting a healthy nation.
 This tax raises revenues for the government.
The potential disadvantages are:

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 It becomes difficult to make a basket of selective fatty foods as there are many types of
food that contributes in obesity when consumed in excessive amount. Moreover, the food
consumption pattern of people is dynamic. Hence, selection of food items for taxation is
challenging.
 Obesity is caused due to many factors other than food, such as, genetic factors, levels of
exercise, nature of job, and any disease like thyroid (Craven, Marlow and Shiers 2012)
 Administration cost of collecting food tax is quite high.
 This tax is likely to be regressive in nature as lower income group spend a higher
percentage of their income in the fatty foods like junk food, sugary beverages and in case
of staple food they are price insensitive even if those are healthy (Smed and Robertson
2012).
 It results in fall in the aggregate demand for fatty foods in the economy, leading a fall in
profit for the food manufacturers. At the same time, people buy cheaper substitute
products from international market, as in the case of Denmark, which increases the
revenues for the other economies and reduces that of the domestic economy, resulting in
a setback for the country.
Conclusion
The fat-tax in Denmark was one of the most innovative measures to change the eating
habits of people for a healthier life. Fatty foods create negative externalities in terms of obesity,
diseases, loss of productivity and many more and hence, imposing a tax would increase the
government revenue and raise the market price, leading to a fall in demand and consumption.
However, the initiative failed in Denmark due to various economic and political reasons and it
did not reflect much change in the food habits of people.

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References
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