Thursday, May 28, 2009

A Bit More on the Possible Soda Tax

Yesterday's comment suggested that unless we tax all food or use only a single criterion for deciding what should be taxed, deciding what to tax and how much to tax it will be a tricky business. Of course, on the subject of vitamin fortified sodas, one reasonable question might be "if it is profitable why aren't people doing it already"?

The interesting thing is that while I am not aware of any vitamin fortified sodas, I am aware of vitamin fortified sweet beverages. I am even aware of brands of orange juice that are fortified with calcium and other vitamins. My nine year old can list off all the vitamins in the "for kids" version of one major orange juice brand.

Why do this? Product differentitation? The market for beverages has a lot of competition but does not fit the definition of being perfectly competitive. Product differentiation is important. However, we can presume that when it comes to soda, there is not a lot of vitamin fortified soda because the cost of doing this is not going to yield enough of an increase in the demand and ultimately the marginal revenue to increase profits.

So, why would it be more likely under a system with a tax on sodas? Well, taxing sodas would not change the demand but would change the marginal revenue to the soda producers at whatever price the consumers paid in the market. If the algorithm for determining taxes on sodas were based on a tradeoff between calories and nutrition, if the manufacturer could add vitamins at a low marginal cost and avoid the tax, it may be possible to capture more market share and increase taxes.

In fact, we might even see vitamin fortified alternative sweetener sodas emerge if people who had been drinking zero calorie sodas were tempted to switch to sugared sodas for the nutrition. Now, that would be an even more surprising effect of taxing sodas if it were to occur.

All because of product differentitation and an attempt to maintain market share and ultimately profits.

Thinking through things like this is a favorite pass-time of economists. There are almost always unintedned consequences of policy because we can only think of so many things like this and often the real market will come up with things we never expected.

Wednesday, May 27, 2009

Would a Soda Tax Lead to "Vitamin Fortified Soda"?

In general, food (other than restaurant food and prepared food) is not taxed. Presumably, this is because it is seen as more of a necessity than other goods. There is discussion of a variety of possible taxes on foods that are thought to contribute to obesity. A FB friend pointed me to two articles about a possible soda tax when I commented that I will be teaching a course on the economics of obesity ( and

I would think that of all the food taxes that we might (and I say carefully--MIGHT) get people to agree on, a tax on soda--specifically sugared soda--may be considered most reasonable. However, I think there might be an unintended consequence--vitamin fortified soda in our collective future. Let's consider a few alternatives.

First, let us consider taxing all soda rather than taxing only sugared soda. While sodas sweetened with sugar substitutes have few or no calories, some people worry about the health effects of the sugar substitutes. However, I recently heard someone comment that while the substitutes may cause cancer because of their chemical properties, enough sugar can contribute to the risk for cancer as well. Enough sugared soda will increase the risk of becoming overweight and this can contribute to cancer. So, we might argue that all sodas should be taxed, but taxing only sugared sodas seems reasonable since it creates a whole series of risks (including cancer) that are related to being overweight.

Second, we could tax other high calorie foods. However, it could be argued that many have at least some redeeming qualities. Chocolate with nuts has the nutrition of nuts. Juices have lots of natural sugars and lots of calories but also have the nutrition of the fruit (or vegetables) from which they are made. Even sugared cereals could be argued to be fortified.

If a policy maker were to make the last argument, he would implicitly be suggesting that any tax would not be based on only caloric content but would be determined through some process recognizing a tradeoff between calories and nutrition. This might allow for producers of sodas to avoid having their goods taxed--by figuring out how to produce vitamin fortified sodas.

Wouldn't that be an interested unintended consequence of a soda tax?

Of course, this is all strictly hypothetical and there is absolutely no guarantee that a soda tax could be successful in politics when there are powerful interests who would argue heavily against such a tax.

Tuesday, May 26, 2009

Restarting with a comment on teaching

Well, I got started on this blog thinking that it would be both an interesting way to share some ideas about health policy--which was supposed to be a huge thing under our new president (as you can tell, I'm not so convinced anymore)--and to use it as a teaching tool. That makes it very appropriate that I am restarting this (after a bit of a hiatus) with a comment about teaching.

Last week, I had the pleasure of meeting some students with whom I will be working in the fall. They were a great bunch. Over lunch we had an opportunity to discuss a law related to nursing practice in their state. The issue is whether nurse practitioners (i.e. nurses who have been trained to provide primary care) should be allowed to practice completely independently or should be required to have a contract with a physician. Their state currently requires them to have a contract with a physician. That does not make a lot of economic sense. The nurses are trying to prove that to policy makers. Unfortunately, policy makers are not always driven by economics--they are driven by politics. And the physicians tend to be more powerful than the nurses politically speaking.

So, why doesn't this rule necessarily make economic sense? (1) Economics says that we should generally allow complete flexibility in the process of resource allocation. Requiring a nurse practitioner to find a physician with whom to contract limits nurse practitioners' choices. We should allow more flexibility unless we put patients at risk as a result. Evidence suggests we don't. (2) We claim that the number of primary care providers is insufficient. Nurse practitioners provide a potential solution that is actually less costly than physicians. Less costly solutions, as long as the quality is similar, are a good thing. (3) When a physician moves, dies, or is otherwise unavailable, under the system in which my students practice they have to close up shop immediately. Again, limits the opportunities for primary care. This can actually have externalities (i.e. effects on people other than the nurse practitioner and patient) if the patient ends up with an infection that can be spread to others and that they would not have gotten with higher quality primary care. (4) Perhaps we are worried about the quality of care that nurse practitioners can provide. Almost all evidence suggests that nurse practitioners provide care equal to primary care physicians. Economic theory suggests that nurse practitioners will protect themselves professionally by making sure they have physicians to whom they can refer patients who are out of their scope of practice. Failing to do so would put them at risk for malpractice.

So, the economic reasoning suggests that nurse practitioners should be allowed to practice without being mandates to have a contract with a specific physician.

How does this all relate back to teaching--the nurses with whom I was speaking actually thought that economics might be interesting after I explained things about an issue of interest to them using economics. Before that they had been a little worried.