A Sin Tax on Junk Food??

Recently the Medical Society of P.E.I called for a junk food tax -- an excise tax placed on "junk food" similar to tobacco and alcohol taxes. (Read the story on CBC's website here.) There is actually a good basis in economic theory for such a tax. Unfortunately, effectively implementing such a tax would be no easy task. The rationale for such a tax is based on the belief that junk food, however it is defined, is creating a public health crisis. The extent of this crisis is going to create externalities in that those who are affected by diabetes and obesity and this will impose costs on the rest of society. As such, it is in the government's best interest to curb these problems and one of their main sources. How would such a tax impact the consumption of junk food and would it be effective? That is the first question that needs to be asked in this case. The logic is simple -- a junk food tax will cause the supply curve to shift to the left and as a result, the price will rise and due to the law of demand (which says quantity demanded declines as the price rises). The extent to which a junk food tax actually reduces consumption ultimately hinges upon how flat or steep the demand curve is. If demand is relatively elastic and hence the demand curve is relatively flat, such a move would likely have a large impact on consumption. On the other hand, if demand is relatively inelastic, resulting in a steeper demand curve, the tax will have little impact on consumption -- merely raising the price by consumers (and putting more money in the government's coffers). This is why cigarette taxes generally have little impact on consumption -- it takes a very large increase in price to bring about any change in consumption. Given the nature of junk food, it is likely that demand will be quite inelastic. As a result the demand curve will be quite steep and so the tax will not have much impact on consumption. That said, however, if such a tax were implemented and the money directed to media campaigns that show consumers the bad things that junk foods do to their bodies, then such a tax might be able to achieve something. However, if we think that just putting the tax on the good will reduce consumption, then we are mistaken -- about as mistaken as we are if we think there is any nutritional value in soda pop. Apart from the practicalities in terms of the actual effect such a tax would have, there is also the matter of implementation. The PEI health minister, Chester Gillan rightly pointed out that defining what a junk food is will be difficult. If we are not careful, as we often are not, we could end up creating all sorts of problems with market distortions and activities to find loop-holes. If so, the tax will not only not achieve anything in terms of junk food consumption but also create numerous other problems in the marketplace. The real solution to junk food consumption issues is to reduce demand -- given its inelastic nature, a junk food tax will have little impact there. A better course of action is more aggressive public education as well as making junk food harder to get by getting rid of vending machines in schools.