Negative externalities of consumption and how much sugar in a Coke?

Negative externalities of consumption is where the consumption of a good may have spillover costs or negative externalities for others e.g. passive smoking, drink driving, sugary drinks. If left to the free market goods that have negative externalities of consumption will be under priced (Pm) and over consumed (Qm) compared to the socially desirable price (Ps) and quantity (Qs). At Qm the MSC > MSB therefore the quantity needs to reduce until the MSC=MSB. The government could tax the good, increasing its price and lowering the level of consumption back to more socially desirable levels.

Source: Elearneconomics

Coke and how much sugar?

The video clip below, although a bit old, is from the BBC Newsnight Programme in which Jeremy Paxman interviews President of Coca Cola Europe James Quincey. How much sugar is in a cup of Coke? A ‘small’ cinema serving is said to contain 23 teaspoons on sugar, while a large contains 44 – ‘each to be consumed in a single sitting.’ You can see the amount of sugar for yourself when Paxman pours out the sachets in each cup. Like with the tobacco industry quite a few years ago, the pressure is now on drink companies to reduce the amount of sugar in drinks because of the negative externalities of consumption that are associated with it.

Externalities on elearneconomics has written answers that allows students to recall information and apply it to assessment style questions. Immediate feedback allows for true student-centred learning and understanding.

Obesity and the growth model

ObesityObesity it turns out is actually good for the economy. More consumption of food, particularly processed food, contributes to more economic growth. Poor health, strangely enough, can be considered an economic bonus. Bad food, too much food and drink, might be tragic in health terms but when it comes to the economy it would seem that obesity pays. But obesity doesn’t pay when it comes to the natural capital of the planet. Some economists have seen this obesity issue as indicative of wider economic, environmental and social problems. They take the economic argument one step further and link obesity to greenhouse gas emissions. Unnecessary over consumption of food is putting pressure on the environment through farming and manufacturing processes and hence contributing to its degradation.

There is proof to support the belief that while economic development is for the most part undoubtedly associated with human health, this is not always the case. The measure of economic growth – GDP – the value of the output of goods and services, does not consider the negative contributions that it might make to an economy. Ten percent of the developed world is made up of drug alcohol and cigarette sales and dealing with all these, medically of course, adds to the GDP and it is ironic that some cigarette manufacturers also produce surgical equipment and therefore making and doubling the benefit for GDP from smoking.

However growth is related to people living longer and this has been apparent with the improvements in healthcare in developed countries over the last century. In the developing world there has been a change from a high presence of infectious diseases to that of persistent illnesses including heart disease, strokes etc and is reflected, in some cases, in a disability for life. According to Garry Egger and Boyd Swinborne obesity is not a disease but a signal. It’s the canary in the coalmine, which should alert us to bigger structural problems in society. There are a number of areas where humans have achieved a peak of success, a sweet spot, but now that very success is turning on us and threatening to unravel centuries of achievement.

On the one hand, economic growth has over centuries led to a steadily improving standard of living, better levels of health and ever increasing life spans. In economic terms this reflects the start of a point of diminishing marginal rates of return from continued investment in the growth model.

Diminishing rates of return for the growth model

Mortality and economic growth data collected on the Swedish economy between 1800 to 2000 has shown the commencement of a diminishing rate of return on economic growth in relation to mortality rates. This coincides, not unexpectedly, with the leveling of improvements in health made from the decrease in infectious diseases associated with development, but with the consequent increase in chronic diseases associated with modern lifestyles, driven as they are by the modern environment. It is this switch, from predominantly infectious disease, to lifestyle-related chronic disease, and the consequent breakdown in the human immune system that differentiates the early from late stages of economic development. Several developing countries, such as China and India, appear to be experiencing this issue of chronic disease and at a more rapid pace because of their levels of GDP. In China for instance more than a quarter of the adult population are overweight or obese, as people add more meat and dairy products to their diet, causing chronic disease. According to a study in the Journal of Health Affairs “we need to find the right investments and regulations to encourage people to adopt a healthy lifestyle, or we risk facing higher rates of death, disease, and disability and the related costs.”

The reverse applies to Cuba where they experienced improved health conditions with the withdrawal of the Soviets in 1989. Over the next decade there was a significant improvement in health:

• Decrease in food intake of 1000 kcal/day average
• Mortality rate decrease by 20%
• Obesity reduced by approximately 50%
• Deaths from heart disease reduced by 35%
• Deaths from stroke reduced by 18%

Final thought
It seems to be apparent that the current economic growth system cannot keep going in perpetuity. As developed economies grow there comes a point where there is a diminishing marginal rate of return on investment in terms of climate change and in particular human health. As Keynes indicated at the Bretton Woods conference in 1944 this current model of economics, ie. growth driven, will need to change in the next 100 years.


Obesity, Chronic Disease, and Economic Growth: A Case for “Big Picture” Prevention by Garry Egger

Radio New Zealand – 30-1-11 Interview with Garry Egger

Negative Externalities – Information Failure and Obesity

ObesityOne of the biggest threats to world health is that of obesity and sugar is the source of the weight gain amongst many people. It is ironic that sugar consumption was accelerated in the 1980’s after it were introduced into processed foods to deal with the health scare concerning saturated fats. Governments are now becoming more aware of this issue as it starts to absorb their health budget – UK spends £4bn on obesity related health issues. Norway, Mexico and the states of California and Illinois have introduced a tax on full-calorie soft drinks. Taxing sugar drinks does increase the cost of consumption and generates revenue to pay for the health costs that the overweight impose on society. But are there other options that they should be trying? Taxation might reduce some consumption but information about public awareness could be a more efficient option.

Information about sugar – a better solution?

A simple solution to obesity is to eat less and take more exercise. The World Health Organisation recently halved its recommended daily allowance, saying we should have no more than six teaspoons a day – less than one fizzy drink. However much of the sugar we consume is hidden within processed foods – high-fructose corn syrup which is a cheaper alternative to sugar. Food needs to be properly labelled and it is interesting to see the UK government are changing the way foods are labeled to assist shoppers to monitor their intake of harmful food using a simple traffic light system. But it doesn’t help that the US and EU governments still subsidise sugar production. However the real aim of focusing on sugar is that we start to lead healthier lives.

Economic Insecurity and Obesity

There is no doubt that the social costs (private cost + external cost) associated with food consumption have been well documented. Rising obesity rates especially in those affluent developed nations have caused authorities to consider the reasons behind this issue. It transpires that economic insecurity plays a significant role in explaining trends in obesity for many affluent countries.

What is Economic Insecurity?

In July 2010 the Economic Security Index (ESI) was developed by Yale Professor Jacob Hacker. It is designed to provide a meaningful, succinct measure of Americans economic security. The three key determinants of economic security it focuses on are:
1 Large losses in household income
2 Large spikes in house-hold medical spending
3 The adequacy of household financial wealth to buffer these losses and spikes.

Efficiency Obesity trade-off

Although last twenty years has seen countries move to a more market based economic system but since the global financial crisis (GFC) there has been a U turn in some countries. Research has shown that the population of those countries that have adopted a more free market approach to running their economies, have experienced personal economic insecurity (unemployment etc.) which has given rise to weight gain. The table below shows that the countries through to be free market have higher obesity rates than those that are more planned in nature. Countries with free market policies have 4% higher obesity rates on average.

Obesity economies

Source: T. Smith (2012), Does economic liberalisation cause obesity? EcoNZ@Otago – Issue 29 – September 2012


The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.


Heart attack capitalism

Just fininshing off Unit 3 of the AS course on externalities/market failure and I came across an article by former IMF Chief Economist and now Harvard Professor Ken Rogoff (co-author of “This Time is Different”) on obesity and the food industry’s link to the wider problems of present-day capitalism.

Obesity causes significant externalities – heart disease, some types of cancer, affects quality of life etc. It also impacts on others in that the health system (which is generally tax payer funded) has to expend more of its income – furthermore there is lost productivity. The chemical additives are well known as the major factors that increase weight gain amongst people but as Rogoff points out “from a conventional growth-accounting perspective, they are great stuff”. Who benefits?

Agriculture – paid (subsidies from Government) for growing corn
Food Processors – paid for adding tons of chemicals that make the food addictive
Scientists – paid for finding the right mix of salt/sugar to make instant food addicitive
Advertisers – paid for advocating it.
Healthcare industry – paid for trying to fix the problems caused by obesity.

Highly processed food also creates a lot of employment in various sectors including research, healthcare and advertising. The issue that Rogoff aludes to is that the policiticans would be very unlikely to try and fix this problem as companies who are making money from this industry are also providing significant funds for political campaigns. But there is huge market failure in that the consumer is provided with little information as to the negative effects of processed food but also children are persuaded by television advertising that dominates the commercial side of running televsion stations. Both consumers and producers have little incentive to internalise these costs.

We need much more regulation of these industries if we are to really consider the long-term interests of society. There is that balance between consumer sovereignty (control) and paternalism (Gov’t knows best) but greater information across a variety of goods/services needs to be evidnet if people are to make more informed choices.