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2009-2010 Essay Contest Advanced Economics First Place Essay

Economics of Obesity: Causes and Solutions

Michael Graham
The Blake School
Minneapolis, Minnesota


The incidence of obesity in America has exploded over the past quarter century. The percent of obese Americans—those having a body mass index (BMI) over 30 (about 30 lbs overweight for a 5'4" woman)1—has sharply risen from 15 percent in 1980 to just over 34 percent in 2006.2 Notwithstanding author J. Eric Oliver’s whimsical claim that obesity is not intrinsically harmful3, it is (as he agrees) at least a microcosm of Americans’ fundamental mismanagement of their dietary and exercise needs. The impacts are marked: obese people spend 42% more on healthcare ($1429 more per year)4, obesity costs the nation $75 billion in direct costs each year5, the total cost of obesity is as high as $139 billion per year (indirect costs include absenteeism, disability, and workers’ compensation)6, and obesity is linked to approximately 300,000 deaths each year.7 Notably, many of these costs are borne by private hospitals, the government, and businesses rather than the obese citizens themselves, an important economic concept.8

Obesity’s Red Herrings

Unfortunately, many policymakers are misled by red herring culprits for obesity. To be sure, it cannot be a decrease in exercise; Americans’ energy expenditure habits have been static over the time period.9 It cannot be cultural changes; data showing the same trends among fresh immigrants to the United States suggest there is not a driving cultural force behind obesity.10 It cannot be fast food restaurants’ “super-sized” bundles; there has been no discernible increase in calories per meal.11 It cannot be poverty; there is a decreasing gap between obesity rates of different socioeconomic population segments over the time period12, with much of the remaining gap attributable to varying genetic predispositions to obesity associated with race.13

The True Culprit: Snacks

A litany of studies has shown that Americans have fundamentally increased their caloric intake over the last quarter century and this increase fully accounts for America’s ballooning obesity rate.14 This increase is due to an increase in meals per day; since 1975, the average snacks per day has increased by 60 percent.15 Moreover, these snacks are often high in calories and low in nutritional value: “sales of high-salt, high-calorie snack foods have skyrocketed, while sales of fruits and vegetables (excluding potatoes) has only increased marginally,” particularly in the soft drink sector.16 In addition to these factors, obesity itself has powerful biological and social positive feedback-mechanisms that only add to the problem. First, as Oliver explains, “To consume about three hundred calories, all one needs to do is eat a seventy-cent bag of potato chips, a Snickers bar, or six Oreo cookies. To burn off three hundred calories ... the average person needs to walk vigorously for about three miles.”17 Second, studies demonstrate that children’s diet and exercise habits mimic their parents.18 So then, generational progression is not enough to combat obesity. Not only are the obese faced with an uphill battle reversing their state, but obesity begets more obesity as time progresses.

Market Failures

There are two major market failures that have produced the caloric increase: the detrimental externalities of obesity and consumers’ inability to efficiently allocate between the present and future. The detrimental externalities of obesity are manifest. Obese citizens pay for little of the total cost of their obesity. Because much of the cost is passed onto private hospitals, the government, and businesses, citizens actually become more obese than they themselves are willing to pay for. The resulting societal detriments burden everyone inthe economy.

People’s precarious tendency to buy more obesity than the socially optimal level is compounded by their failure to adequately allocate between the present and future. Beginning in the late 1970’s, numerous technological innovations in food preparation greatly increased the efficiency of food production both in terms of time and monetary investment.19 This led both to the widespread development of processed foods (those foods which are most often used as snacks) and to major time savings in food preparation. For instance, “the average time mothers spend preparing meals at homes has declined by more than 50 percent in the last two decades.”20

While these developments may seem beneficial, the vastly lowered costs of eating have combined with wide-spread hyperbolic discounting to produce the increase in caloric intake.21 This is because individuals deviate “from the usual standard rational choice models of uniform discount rates” by engaging in hyperbolic discounting—using a short-run discount rate that is larger than the long-run discount rate.22 Thus, when food becomes readily available to individuals, the high marginal utility of eating is not properly compared to the future costs of increased intake, resulting in overconsumption.23

The Economic Solutions: Deliberate Taxation

The total costs of obesity to American society, while intrinsically incalculable, in combination with the widespread market failures provide strong justification for judicious government political-economic action to realign incentives and correct the failures. The application of two indirect taxes would make great strides toward correcting these failures while, provided effective implementation, minimizing unplanned excess burdens.

Given the clear and widespread detrimental externalities of obesity, the government should institute an excise tax (specifically, a value-added tax) on foods with a high-caloric content but low nutritional value. While there have been historic impasses with implementing such taxes, the initial expenditures in defining which foods are included under the tax would easily be recovered by shifting more cost onto consumers, thus reducing total consumption of obesity to its socially optimal level. In addition, the government should create a payroll tax for obese citizens to supplement higher premiums for the obese to pay, thus further shifting the marginal social cost back onto obese citizens.

Lastly, the government should earmark at least some of the revenue raised from these taxes to fund community education programs. The cost-efficacy of well-selected education programs is especially appealing; one such program doubled the market share for low and fat-free milk in several communities through campaigns that cost as little as 22 cents per person.24 Indeed, another program was found to have a benefit-cost ratio of 10.64 in terms of expenditures on the program versus dollar benefits of avoiding or delaying health-care costs and losses of productivity associated with obesity.25

Preliminary analysis of some nutritionally detrimental foods has demonstrated that a marginal tax rate of 20 percent or more would be necessary to instill change in consumer preferences due to a relatively high price inelasticity of demand. However, there is compelling evidence that consumers’ demand for soda is elastic enough to support lower marginal tax rates and still result in reduced consumption (with more of the tax incidence placed on the consumer because of the elasticity). Indeed, a 10 percent increase in the price of soda has been shown to halve consumption.26 Moreover, the public campaigns financed by the taxes would serve to shift the cross-elasticity of demand such that an increase in price of nutritionally detrimental foods would result in increased demand for healthier substitutes. For example, a negative shift in demand for high-fructose corn syrup would both send consumers searching for alternatives (e.g., juice) and shift the production possibilities frontier such that more farmers would grow alternatives (e.g., fruit) in response to the shift in consumer preferences.

While the value-added tax on nutritionally detrimental foods and the payroll tax are both regressive, the government should not reject them as solutions on equity concerns. First, those at the bottom of the income distribution could be insulated from this incidence by increasing the value of food stamps toward healthy food items. Additionally, even if citizens with comparatively lower incomes were taxed more, this would ultimately be beneficial since obesity leads to lower wages inthe work force and increased personal medical costs.27 Lastly, public campaigns would have funds to address whatever food concerns there are in income disadvantaged communities in the status quo, thereby reducing the excess burden on those citizens. Thus, the cost-benefit analysis of these taxes would always prove to be beneficial to the income-disadvantaged.


After eliminating the tantalizing but ultimately misleading potential causes of obesity in America, the true guilt of increased caloric intake due to widespread snack consumption becomes clear. In consideration of the astounding detrimental externalities of obesity and modern food processes’ tendency to exacerbate citizens’ behavioral tendency to discount hyperbolically, the necessity of government intervention becomes equally clear. Indeed, through shifting the marginal private cost of being obese toward the true marginal social cost, the taxes would serve to rein in obesity to its decidedly much lower socially optimal level of equilibrium. In the end, these policies would serve to better maximize utiles inthe American economy and therefore constitute the optimal economic decision.


1/ Jean Kinsey. “The Economics of Overeating,” (Lecture, College in the Schools Teacher Workshop from University of Minnesota, Minneapolis, October 23, 2009).

2/ Jeffrey Levi, PhD., Serena, Vinter, MHS., Liz Richardson, Rebecca St. Laurent, JD., and Laura M. Segal, MA. “F as in Fat: How Obesity Policies Are Failing in America.” Healthy Americans. (accessed January 11, 2010), 10.

3/ J. Eric Oliver. Fat Politics: The Real Story Behind America’s Obesity Epidemic. (London: Oxford University Press, 2006), 3-5.

4/ Kinsey. “The Economics of Overeating.”

5/ Levi et al. “F as in Fat: How Obesity Policies Are Failing in America,” 27.

6/ Ibid.

7/ Kathleen Seiders, and Ross D. Petty. “Obesity and the Role of Food Marketing: A Policy Analysis of Issues and Remedies.” Journal of Public Policy & Marketing 23, no. 2 (2004): 153-169. (accessed January 10, 2010), 153.

8/ Kinsey. “The Economics of Overeating.”

9/ David M. Cutler, Edward L. Glaeser, and Jesse M. Shapiro. “Why Have Americans Become More Obese?.” The Journal of Economic Perspectives 17, no. 3 (2003): 93-118. (accessed January 11, 2010), 103.

Oliver. Fat Politics: The Real Story Behind America’s Obesity Epidemic, 150.

10/ Heather Antecol and Kelly Bedard. “Unhealthy Assimilation: Why Do Immigrants Converge to American Health Status Levels?.” Demography 43, no. 2 (2006): 337-360. (accessed January 11, 2010).

11/ Cutler et al. “Why Have Americans Become More Obese?,” 101.

12/ Q. Zhang and Y. Wang. “Trends in the association between obesity and socioeconomic status in U.S. adults: 1971 to 2000.” Obesity Research 10 (2004): 1622-1632. (accessed October 11, 2010).

Allison C. Morrill and Christopher D. Chinn. “The Obesity Epidemic in the United States.” Journal of Public Health Policy 25, no. 3/4 (2004): 353-366. (accessed January 11, 2010), 355.

13/ Levi et al. “F as in Fat: How Obesity Policies Are Failing in America,” 27.
Eric A. Finkelstein and Laurie Zuckerman. The Fattening of America: How The Economy Makes Us Fat, If It Matters, and What To Do About It. New York, NY: Wiley, 2008, 52.

14/ Cutler et al. “Why Have Americans Become More Obese?,” 101.

Maria L. Loureiro. “Obesity: The Economics of a “Super Size” Problem.” CHOICES Magazine, Fall 2004. (accessed January 11, 2010).

Morill et al. “The Obesity Epidemic in the United States,” 359.

15/ Cutler et al. “Why Have Americans Become More Obese?,” 101.

16/ Oliver. Fat Politics: The Real Story Behind America’s Obesity Epidemic, 134.

17/ Oliver. Fat Politics: The Real Story Behind America’s Obesity Epidemic, 151.

18/ lbid., 53.

19/ Cutler et al. “Why Have Americans Become More Obese?,” 106.

20/ Oliver. Fat Politics: The Real Story Behind America’s Obesity Epidemic, 136.

21/ Cutler et al. “Why Have Americans Become More Obese?,” 113.

22/ Richard A. Epstein. “Behavioral Economics: Human Errors and Market Corrections.” The University of Chicago Law Review 73, no. 1 (2006): 111-132. (accessed January 11, 2010), 130.

23/ Cutler et al. “Why Have Americans Become More Obese?,” 112.

Darius Lakdawalla, Tomas Philipson, and Jay Bhattacharya. “Welfare-Enhancing Technological Change and the Growth of Obesity.” The American Economic Review 95, no. 2 (2005): 253-257. (accessed January 11, 2010), 253.

Cheryl L. Hayne, Patricia A. Moran, and Mary M. Ford. “Regulating Environments to Reduce Obesity.” Journal of Public Health Policy 25, no. 3/4 (2004): 391-407. (accessed January 11, 2010), 392­393.

Finkelstein et al. The Fattening of America: How The Economy Makes Us Fat, If It Matters, and What To Do About It, 19.

24/ Marion Nestle and Michael F. Jacobson. “Halting the Obesity Epidemic: A Public Health Policy Approach.” Public Health Reports 115 (2000): 12-24. (accessed January 11, 2010), 10.

25/ Fred Kuchler, Abebayehu Tegene, and J. Michael Harris. “Taxing Snack Foods: Manipulating Diet Quality or Financing Information Programs?.” Review of Agricultural Economics 27, no. 1 (2005): 4-20. (accessed January 11, 2010), 18.

26/ Kinsey, “The Economics of Overeating.”

27/ Russel M. Viner and Tim J. Cole. “Adult Socioeconomic, Educational, Social, and Psychological Outcomes of Childhood Obesity: A National Birth Cohort Study.” British Medical Journal 330, no. 7504 (2005): 1354-1357. (accessed January 11, 2010).