Download Example one: Fat Tax

Example one: Fat Tax
Topic:
The Overweight Problem and Fat Tax
Relevant economics
topics:
Market intervention; efficiency and equity; public finance
Type of material:
Statistics, news, comics
Question design
(Total marks: 26)
Elementary questions (18 marks);
Advanced-level questions (8 marks)
Rationale of design:
The overweight problem is one that most students will find familiar, as they will be preequipped with the knowledge through studies in other subjects (e.g. Biology, Liberal
Studies). In this example, the overweight problem serves as an point of entry where
students may apply economics concepts to analyse issues arising from the
overweight problem, so that they may understand the chief concerns in the
government’s formulation of relevant policies (Questions (a) to (e)), and ultimately
identify their own stance and evaluate whether the government should levy a fat tax to
address the overweight problem among the Hong Kong population. (Question (f)).
As the economy develops, the quality of life of the general populace has seen
substantial improvement, and subsequently the overweight issue has become one of the
most pressing public health issues in Hong Kong and around the world. Economists
have pointed out that levying a fat tax on junk food may help alleviate the problem of
obesity.
1
Source A: Overweight Population Worldwide and Projections
Source: World Health Organisation
Source B: Economic losses brought about by unhealthy diet
According to worldwide academic reports, over 2.1 billion persons are overweight
or obese, accounting for nearly 30% of the global population. Prolonged
consumption of foods with “three highs” (high sugar, salt and fat content) and
saturated fats can lead to obesity, bringing various detrimental effects including
health problems and lowering overall social productivity.
Source: Consolidated from various sources, 2014
Source C：
Fat Tax, also known as “Junk Food Tax”, is a per unit tax levied upon junk food
containing “three highs” (high sugar, salt and fat content) and saturated fats (e.g.
milk and meats). Its aim was to discourage citizens from ingesting such food
items. Denmark is the first nation to levy the Fat Tax, which was nevertheless
abolished by its government after one year as it has proven ineffective in changing
eating habits, but has led to the emergence of “three-highs” food items in oversize
packages.
Source: Consolidated from various sources, 2012
2
Source D: Various stakeholders have different views on levying the fat tax,
summarised as below:
Given the current high production
costs the fat tax will make business
even more difficult. If SMEs close
down as a result, it will further drive
up Hong Kong’s unemployment rate.
Potato chips
manufacturer
The Fat Tax covers daily
consumption food items including
milk, which will add an unfair
burden upon grassroots citizens
Legislator
3
Questions
1. Referring to Source A, describe the changing trends of the overweight population
and analyse its impact upon future public health expenses. (3 marks)
Answer:
According to Source A, the overweight population is on the rise with overweight
persons rising from 400 million to 700 million between 2005 and 2015, recording a
nearly 60% increase.
With the overweight population on the rise, future public health expenses are
expected to rise.
2. Referring to Source B, analyse why the overweight issue can lead to an external
effect. (3 marks)
Answer:
External costs are generated by the overweight issue.
Prolonged consumption of food items with “three highs” and saturated fats create
health problems. Meanwhile, as the overweight population rises productivity drops
and the government needs to spend more on healthcare; overweight persons
however do not compensate the society, leading to a divergence between private
and social costs.
3. Referring to Source C, Denmark is the first nation to levy the Fat Tax. However, the
tax was abolished by its government after one year as it proved ineffective in
changing eating habits. Analyse the reasons using the concept of price elasticity of
demand. (2 marks)
Answer:
There is a relatively low price elasticity of demand for “three-highs” food items
among Denmark citizens.
As citizens are used to consuming “three-highs” food items, even when the price is
driven up by the tax they still need time to change their habits and find substitutes.
Therefore, they have a low price elasticity for “three-highs” food items (i.e.
percentage increase in price is higher than percentage drop in quantity demanded).
4
4. Referring to Source C, use a supply and demand diagram to illustrate how the Fat
Tax will affect the quantity of “three-highs” food items purchased by the public.
5. (4 marks)
Answer:
Explanatory text
Fat Tax drives up the marginal cost of per unit junk food, as a result the supply curve
shifts upwards from S0 to S1.
When other factors remain unchanged, the equilibrium price of “three-highs” food
items rise from P0 to P1, while the quantity purchased by the public drop from Q0 to
Q1.
Diagram:
Supply shifts upward from S0 to S1
Qt (Quantity) drops from Q0 to Q1
5
5.
Referring to Source C, use the law of supply and demand to analyse why the
levying of the Fat Tax results in emergence of “three-highs” food items in larger
packages. (3 marks)
Answer:
After levying the Fat Tax, the same tax is chargeable for “three-highs” food items
regardless of package size.
While this drives up the price of “three-highs” food items of all package sizes, the
levied tax takes up a lower percentage of the price of larger packages than of
smaller packages. The relative price of large-sized “three-highs” food items will thus
be lower.
According to the law of demand, people tend to purchase food items of large-size
packages, thus such packages are manufactured in larger quantities.
6. Referring to Source D, explain why the legislator believes the levying of the Fat Tax
constitutes unfairness for the grassroots population.
(3 marks)
Answer:
The Fat Tax is an indirect tax, and partly targets daily necessities. The tax takes up
a larger percentage of the income of low-income individual than that of high-income
individuals, thus constituting unfairness for the grassroots population.
7. Referring to the information above, and applying your knowledge in Economics,
discuss whether the Hong Kong Government should levy a Fat Tax to tackle the
overweight issue of the Hong Kong people. (8 marks)
The answer may include the following:
Should, for example:
Discussing the validity of the measures
- The Fat Tax can lower the supply of junk food, increase their market price, and
reduce quantity of junk food purchased by the public. It should help to address
the overweight issue and reduce future public health expenses.
6
Discussing other governmental/social benefits brought about by the measure:
- The overweight population has a negative impact not only on personal health but
on society as a whole, e.g. rising medical costs. The levying of the Fat Tax
increases the private marginal costs of the manufacturers. If the amount levied is
equal to the marginal external costs under efficient output level, the market will
return to the level of efficiency when the manufacturer reduces the production.
- Overweight-related health issues will drive down labour productivity and
subsequently long-term supply, total productivity and full-employment output level
will drop. The government should therefore levy the fat tax to address the
overweight problem of Hong Kong people in order to promote local labour
productivity and drive the economic development of the city.
- Levying the Fat Tax can increase government income from taxes and help
expand the existing narrow tax base.
Should not, for example:
Discussing the validity of the measures
- If the Fat Tax is levied as a per unit tax, it will be a form of indirect tax. If the price
elasticity of supply is lower than the price elasticity of demand, the tax may not
lead to a significant increase in market equilibrium price and reduce quantity of
transaction. Therefore the Fat Tax may not be effective in tackling the overweight
issue of the Hong Kong people.
- If the public believes that junk food is a daily necessity, their demand for junk food
is a relatively price inelastic ,thus the percentage increase in price will be higher
than the percentage decrease in quantity demanded. The consumption habits of
the public may thus remain unchanged.
Discussing other governmental/social benefits brought about by the measure:
- If the Fat Tax is levied, the increase in tax revenue of the government will be less
than the reduction in producer and consumer surplus, leading to a deviation from
efficiency in the market, creating a net loss.
- If the Fat Tax is levied in the form of per unit tax, it will be a type of regressive tax
meaning the tax rate will decrease when the taxable income increases. As the
same tax is levied for the same food item regardless of income, low-income
individuals will contribute a higher percentage of their income to the tax compared
to high-income individuals, aggravating the poverty gap.
7
- Levying the Fat Tax will increase the marginal costs of the producer and force
down the production quantity. If certain producers are driven out of the market
because of business difficulties, demand for labour in the labour market will drop
and unemployed population may rise; if working population remains constant, the
unemployment rates will increase.
(Students may apply their knowledge in economics to make reasonable discussions
to support their views. The arguments must however be structured and coherent
with their positioning.)
Marking scheme:
8
Marks
Description of level achieved
7-8
Applies relevant economics theories to underline their positioning and
accurately explain why the fat tax can/cannot resolve the overweight
problem of the Hong Kong people.
4-6
Applies relevant economics theory to suitably explain why the
Government’s levying of the fat tax can/cannot resolve the overweight
problem of the Hong Kong people.
1-3
Roughly explains why the Government’s levying of the fat tax
can/cannot resolve the overweight problem of the Hong Kong people.