The issue of Obesity in New Zealand
Achievement standard 91402
Over the last few years it has been widely accepted that we are facing an obesity epidemic. New
Zealand is currently the 3rd fattest country in the world; this statistic is well above the OECD
average*. The market failure that has caused this epidemic is the over consumption of fast food/
unhealthy food and also the under consumption of exercise or physical activity.
With the over consumption of unhealthy foods there is also is also concern about people not eating
enough healthy food such as fruit and vegetables. The concern caused by this particular market
failure is the increase in health care cost and the decrease in productivity in the work force.
According to Grahame Armstrong of stuff.co.nz “Health spending has grown at the alarming rate of
6-10 per cent a year for the past 10 years, double the rate of growth of the entire economy's gross
domestic product”. There are several ways that government can address the market failure, for
example the removal of GST on fruit and vegetables, taxing food with high levels of fats or sugars, an
awareness campaign on the benefits of healthy living and, subsidising gym memberships.
Market failure is “when the competitive outcomes of markets is not efficient from the point of view
of society as a whole. This is usually because the benefits that the free-market confers on individuals
or businesses carrying out a particular activity diverge from the benefits to society as a whole” from
tutor2U resource on government intervention in markets. Therefore because the cost to society is
greater than the benefit to society there is a market failure. Markets can fail for several reasons one
of these reasons is negative externalities (the social cost of production exceeds the private cost). The
over consumption of unhealthy food leads to obesity, one of the negative externalities of obesity is
the increases in health care costs.
Individual consumption of unhealthy food
P ($)
Ps
Pm
MC
MB
MSB
Qs
Qm
Quantity
This chart shows the individuals consumption of unhealthy food. The marginal benefit to the
consumer is equal to their demand curve; the consumer will continue to buy extra units until the
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benefit they receive is equal to the cost. Consumers will always behave in a way that maximises their
individual utility, in this graph that would be at point Qm. The negative externalities of consuming
unhealthy food i.e. decrease in productivity and increase in health care costs will move MB to MSB.
At the point Pm and Qm the good is under-priced and over consumed this has led to the problem of
obesity in New Zealand and the problems associated with it. Ted Langer professor of food policy at
the London city university says that “fast food is cheaper than other food” and “unhealthy snacks are
cheap and everywhere”. To reduce the consumption of unhealthy food the government can tax this
good up to Ps. This is also suggested by Professor James the head of international task force on
obesity he suggests we should tax unhealthy food and take tax off the healthy food.
P($)
Tax on unhealthy food
P($)
GST on healthy food
S+GST
MC2
S
MPC+tax=MSC
p1
MPC
p2
MC1
MB
MSB
C2
C1
Consumption
D
Q1 Q2
Quantity
On the graph above (tax on unhealthy food) you can see the line MSB (marginal social benefit) is to
the left of the original curve MB (marginal benefit to the consumer); this is because the cost to
society is greater than the cost to the individual. The individual consumption of unhealthy food is at
C1 society wants the consumption of unhealthy food to be at C2. An increase in price from MC1 to
MC2 will cause a decrease in consumption from C1to C2. This increase in price can take the form of a
tax which would then allow the government to remove the GST from healthy food. Currently the
consumption of healthy food is at p1 and Q1. A removal of the GST on healthy food will decrease the
price to p2 which will increase consumption to Q2. The added benefit of this is the removal of the
dead weight loss on healthy food.
The negative externalities of consuming unhealthy food are a lost in productivity and an increase in
healthcare cost. Both these things are related to the health problems caused by consuming
unhealthy food. According to Dr Robert Lustig, a paediatric endocrinologist of the University of San
Francisco, “Nobody dies of obesity they die of a metabolic disease”. The main metabolic diseases are
heart disease, lipid problems, hypertension, type two diabetes, these are known as the metabolic
syndrome. There are also other problems related to unhealthy diets like fatty liver disease, cancer,
dementia, polystic ovarian syndrome. Again according to Dr Robert Lustig 75% of the global health
care costs are due to the metabolic syndrome, and in New Zealand alone we pay $600 million on
health care cost because of obesity. That means that we pay about 1.5 million dollars a day to
combat obesity in this country.
There are negatives to the policy of taxing healthy food and subsidising healthy ones. The main
problem is that the tax on Unhealthy food may be a regressive tax. A regressive tax is “a tax imposed
in such a manner that the tax rate decreases as the amount subject to taxation increases” according
to web definitions. This means the tax will be more for poorer people and these are precisely the
people who depend on unhealthy food as an affordable means to provide food. As this tax will affect
some people more than others it is inequitable, however placed in combination with the other policy
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to remove GST on healthy food this policy may become more equitable. However removing all GST
on all healthy food will mean that the government losses a significant source of revenue. Therefore
it might be better to tax food according to a food index, the healthier food the less GST it carries and
the unhealthier a food is the more tax gets placed on it.
Another market failure is the under consumption of exercise. The graph below shows the individual
consumption of exercise.
The individual consumption of exercise.
P ($)
Pm
MC
MSB
Ps
MB
Qm
Qs
Quantity
The graph above shows how the marginal social benefit (MSB) is greater than the marginal benefit to
the individual. This is because exercise burns fat and sugar which means that the negative side
effects that come from over consuming these things are reduced. The individual consumption of
exercise is at pm and Qm. At point Pm and Qm exercise is overpriced and under consumed. Society
would like the consumption of exercise to be at Qs, in order to encourage the consumption of this
good it will have to be subsidised. In order to increase consumption price has to decrease to Ps, this
will shift consumption to Qs.
The positive externalities of increased exercise are a decrease in the obesity rate and a decrease in
health care cost. According to the Harvard school of public health daily exercise helps prevent the
metabolic disorder and type2 diabetes. It also improves your chances of living longer. Exercise also
helps to relieve symptoms of depression and anxiety and improves your mood, also according to
Harvard school of public health. This means that with the decrease in the metabolic disorder and
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other health cost there would be a decrease in health care costs. An increase in exercise will also
lead to a decrease in obesity.
Market for exercise
P($)
S
S+Subsidy
P2
P1
D
Q1
Q2
Quantity
The graph above show the market for exercise at points Q1and P1 the market is at equilibrium. At
this point the good is over- priced and under consumed. The provision of a subsidy will cause the
price of exercise to fall and so the supply curve will shift right by the vertical distance of the subsidy.
This will cause the equilibrium price to decrease but not by the full amount of the subsidy. This is
because some of the subsidy is passed on to the consumer as a decrease in price, and some of the
subsidy is retained by the producer as an increase in profit. So the equilibrium price will decrease
from P2 to P1, and the equilibrium quantity will increase from Q1 to Q2. The best way the
government can subsidise exercise is to subsidise gym membership, personal trainers, public pools
and sports clubs. This will insure that the subsidy supports the training habits of a wide range of
people. This means that the subsidy can be widely applied.
The good thing about this policy is that it encourages people to go out and exercise. However there
is the possibility that people will get a gym membership, or join a club and still not go on a regular
basis. However the subsidy is also applied to public pools, this means that the entrance fee for public
pools would be cheaper, and in this case people have already decided to go to the pool, and in this
case the subsidy is more effective. However there are some other policies to which this subsidy can
be applied. On July 17 of this year, the Dubai municipality announced its new weight loss event, that
will give participants who loses over 2kgs during the event will receive a gram of gold for every kilo
they lose. Eng Hussain Nasser Lootah, director general of Dubai Municipality says “We carry out a
number of health initiatives every year to benefit the community, and this year’s event aims to
encourage adults and children to lose weight and be healthy”. Obviously the New Zealand
government cannot afford to hand out blocks of gold, but an event like this may encourage people
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to start losing weight and being healthy. The government may offer small prizes of 10 or20, paid for
by the subsidy; this will still be expensive but may have a more positive effect.
According to the research and analysis I have done I believe that this market failure is caused by two
things the over consumption of unhealthy food and the under consumption of exercise. Based on
this I recommend that the government take a two pronged approach to the obesity epidemic. Prong
one to use a food index to decide to what extend a food should be taxed or not taxed, and prong
two to implement a similar structure as the one used in Dubai. This is to create a public event where
the government offers small sums of money to people who have lost over a certain amount of
weight, through both diet and exercise. This event will serve two purposes the first is to encourage
people to lose weight and the second is to create public awareness of the issue and solutions to it,
on a real and personal basis.
These two policies will work best in combination with each other because they address both points
in this market failure. The consumption of healthy food is made more accessible with decrease in
price, and the consumption of unhealthy food is discouraged with a tax. The second issue is also
addressed with the public awareness event which addresses the issue of exercise on a personal basis
for person and isn’t constantly draining the government’s fund.
Individual consumption of unhealthy food
P ($)
Ps
Tax
Pm
MC
MB
MSB
Qs
Qm
Quantity
Currently individual consumption is at points Pm and Qm. With the increase taxation which this
policy suggests from Pm to Ps the quantity consumed should decrease from Qm to Qs.
Individual consumption of healthy food
P($)
Subsidy
Pm
MC
Ps
MB MSB
Qm
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Qs
Quantity
Currently individual consumption is at points Pm and Qm. With the decrease in GST which will
function as a type of subsidy price will decrease from Pm to Ps and the quantity consumed should
increase from Qm to Qs.
The individual consumption of exercise.
P ($)
Pm
MC
Subsidy
MSB
Ps
MB
Qm
Qs
Quantity
Currently individual consumption of exercise is at points Pm and Qm. The event with monetary
prizes will function as a type of subsidy, which means that price will decrease from Pm to Ps and
consumption will increase from Qm to Qs.
Bibliography
TV Series: The vote TV3 Wednesday 21 March 2013 8:30 pm to 9:30pm.
TV Series: The skinny on Obesity from the University of California from 13/4/2012 to 24/5/2012
Documentary: Fat head 3/2/2009
Documentary: Mischief (who made me fat) BBC three Wed 3 October.
News programme: TVNZ news 2/9/2011
YouTube clip: Otago university- you tube clip 2/9/2011
News article: gulfnews.com Lose your weight in gold initiative launches in Dubai By Mariam M. Al
Serkal, Senior Reporter, and Mary Achkhanian, Special to Gulf News Published: 16:12 July 16, 2013
Essay: www.hsph.harvard.edu the benefits of physical activity
Tutor2uEconomics revision focus: 2004 Government intervention in Markets-An introduction
Class notes.
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