(Microeconomics) Forget a sugar or salt tax! 25% subsidy on fruit and vegetables would rescue UK's waistline and stop people turning to cheaper junk food, study finds...

• Economists at Warwick University say it would drive up sales of fruit, veg by 15%
• Could cut price of 400g box of Essential Waitrose Strawberries from £2 to £1.50
• Comes amid crackdown on obesity spurred on by Boris' near-fatal bout of Covid

By CONNOR BOYD DEPUTY HEALTH EDITOR FOR MAILONLINE

PUBLISHED: 18:14 BST, 30 March 2022 | UPDATED: 07:27 BST, 1 April 2022
 

Forget a fat tax — the best way to save the nation's waistline is to subsidise fruit and veg, according to a study. Not only could it shave a few pennies off the weekly shopping list, researchers say the policy could also 'constitute a huge gain for public health'.
 

Economists at Warwick University estimate a 25 per cent subsidy on fresh fruit and vegetables would cause a 15 per cent rise in their sales. The short expiry time of fresh produce means fruit and veg typically have higher fixed costs than ready-meals and junk food which have longer shelf lives.

A 25 per cent subsidy could see a pack of six Pink Lady apples slashed from £2.80 to £2.10, or a 400g box of Essential Waitrose Strawberries cut from £2 to £1.50. The researchers estimate UK supermarkets sold around £10.4billion of fresh produce in 2017, meaning the subsidy would cost the taxpayer around £2.5bn a year. For comparison, the NHS currently spends about £6bn a year on obesity-related illnesses, which is expected to rise to £9.7bn by 2050. It comes amid a Government crackdown on obesity spurred on by Boris Johnson's near-fatal bout of Covid in 2020, which he blamed on being too fat. But many of the policies being considered — including stricter advertising rules and taxes on junk food — have been slammed as 'nannying' by critics. Professor Van Rens, an economist at Warwick, said: 'A subsidy is in some ways the most market-based, least invasive intervention you can think of.

Not only could it shave a few pennies off the weekly shopping list, researchers say a 25% subsidy on fruit and veg could also 'constitute a huge gain for public health'

'Anything less than that is just giving friendly advice and will not get us where we need to be.' From next month mandatory calorie labelling will be introduced in many restaurants, cafes and takeaways in England. And from October 'multibuy' junk food offers will be banned, including 'buy one get one free' deals.

A new watershed policy restricting the advertising of food and drink high in salt, fat and sugar before 9pm will also be introduced by 2023. But the team at Warwick have questioned how effective the policies will be. Professor Van Rens added: 'Obesity is a massive public health problem and we're not going to solve it with tweaks. We need to bring out the big guns.' The new study, published in the journal Science Advances, found that on average Britons pay 40 per cent above the production costs for fruit and veg. Fresh foods have particularly high fixed costs as they are perishable products which requires them to be restocked more frequently. This drives up the price of fresh produce compared to other, unhealthier products which are sold close to their marginal cost.

The economists looked at detailed data on food purchases between 2004 and 2014 from a database in the US of 60,000 households with different levels of income.They used the data to model how much the high costs of fruit and veg deterred people from buying them often. The study found people would buy 15 per cent more fruit and veg if they were cheaper. Only about three in 10 Britons eat the recommended five-a-day - or 400g of fruit or vegetables. The Warwick team estimate their subsidy could close the gap by as much as a third. Professor Van Rens said: 'If there weren't any fixed costs you would expect food to be sold close to marginal cost. And the fact that they are not affects diets.

'A higher price of any product means that people buy less of it. The question is, by how much? 'We find that if the market were working correctly, consumers would buy 15 per cent more fruit and vegetables than they currently do, which would constitute a huge gain for public health.'Mr Johnson announced a crackdown on obesity in 2020 after being admitted to ICU with Covid, which he attributed to being overweight. As part of the plan, new laws restricting offers on foods high in fat, sugar and salt are due to come into effect in medium and large shops in October.

Junk food giants will also be banned from advertising online and before 9pm on TV by January 2023. The Prime Minister has also been recommended by his food tsar Henry Dimbleby to slap processed foods high in sugar and salt with a levy. More than a quarter of children starting primary school are now overweight or obese, rising to four in 10 for youngsters aged 11 to 12. And children from the poorest areas are more than twice as likely to be obese than those from the richest areas. Meanwhile, two-thirds of adults are overweight or obese, costing the health service £6billion a year.

The Government pledged to halve childhood obesity and tackle close inequalities between youngsters from the most and least deprived areas by 2030. Rules due to come into force in eight months time are set to force shops with more than 50 employees to phase out offers on food high in fat, sugar and salt. They will also be ordered to stop promoting unhealthy food offers at checkouts, store entrances or at the end of aisles. Pubs and restaurants are also being hit by the new rules and will no longer be allowed to offer free refills of sugary soft drinks. Local authorities will have powers to issue fines to businesses failing to comply with the rules. The Government estimates the regulations will accrue £60million in health benefits over 25 years through increased quality of life and extending lives through a drop in obesity rates.

The excess consumption of unhealthy food items in the United Kingdom has led to obesity of the national population, resulting in taxation on sugar and salt dense food products, however, government officials in the UK believe that a 25% subsidy on healthier food items such as fruits and vegetable is more effective. The UK market is striving to be healthier through government intervention in the free-market economy which evident through the imposition of subsidies on fruits and vegetables with respect to the concept of negative consumption externality.

Their focus is to subsidize the externality instead of taxing it as it appears to be more effective, the article states that the taxpayer is saving revenue through subsidies with an approximate value of £2.5bn per annum in comparison to the £6bn spent annually on health issues concerning obesity. One of the primary reasons for consumers to spend more on junk food is cheaper prices in contrast to fruits/vegetables. Britons pay an additional 40% than the production costs of foods/vegetables, as a result of the lack of durability of these goods which installs a high fixed cost on them. A study conducted states that consumer expenditure on fruits/vegetables would increase by an approximate 15% if the prices were to fall. Economic rationalism is integral for the implication of the 25% subsidy on more health-beneficial goods by the government, as consumers tend to disregard the opportunity cost of ingesting detrimental food products high in sugar and salt. The affordability of these products leads to overconsumption and affects the national health, a subsidy will lower consumption of unhealthy food products stabilizing the health resulting in social benefit/welfare.

Marginal private cost (MPC). However, social efficiency occurs in Q₂ (where SMB = SMC), therefore, at the free market equilibrium, the social marginal benefit is greater than the social marginal cost. This suggests that if the production of fruits/vegetables was increased to Q_opt ( optimal point of quantity produced); there would be external benefits. To effectively do this, the government may offer a subsidy to incentivize a increased production and lower expenditure. The under-allocation in the production of a good indicates positive consumption externality, which suggests that the quantity supplied is below the social optimum, leading to social benefits/welfare. The next diagram shows decreased price and increased consumption of fruits/vegetables due to subsidy.

This diagram demonstrates the implementation of a subsidy on a positive externality, the diagram showcases that the subsidy lies between Pc and the point of intersection between MSB and MSC, this indicates social efficiency, as the marginal social benefit equals the marginal social cost. The shift from Q_m to Q_opt suggests that the quantity optimum is met, and individuals will now consume more fruits/vegetables, indicating that the subsidy was successful. A major factor contributing to the success is the change in price, as the prices lowered from P_m to P_c, consumers can afford more of the goods. The subsidy resulted in an increase in the supply of fruits/vegetables, since the subsidy is equal to the external benefit, the supply curve is denoted by MPC - subsidy. From the diagram we can identify that subsidy has resulted in the supply curve shifting downward, increasing demand. This indicates the how the subsidies create an incentive for producers, increasing supply of fruits/vegetables. The tax on unhealthy food items will contribute to influencing rational consumer choices. The choice of consuming sugary food has negative consumption externalities such as obesity, cardiac problem and challenges in physical and mental growth/development.

The key concept that can be applied here is intervention. The article highlights the UK government’s intervention in the production of fruits/vegetables to improve public health care through providing a subsidy. It highlights how elastic demand can cause great changes in the consumption patterns and relevance of government intervention.

Negative externalities can be tackled through two methods: taxation and subsidy.The article explores how subsidy reduces negative consumption externality of unhealthy food products as it negates the high fixed costs of fruits/vegetables by increasing production. The theory of elastic demand can be identified as a small change in price results in a widescale change in demand. Furthermore, the article explored how substitute goods of fruits/vegetables are being degraded while these food items are being promoted, as the article promotes banning advertisements of unhealthy food items and fining free sugary drinks in restaurants. The intervention of the government is crucial to ensure a reasonable price for suppling fruits and vegetables for affordability.