Will a Fat Tax Work?

Abstract

Of the many proposals to reverse the obesity epidemic, the most contentious is the use of price-based interventions such as the fat tax. Previous investigations of the efficacy of such initiatives in altering consumption behavior yielded contradictory findings. In this article, we use six years of point-of-sale scanner data for milk from a sample of over 1,700 supermarkets across the US to investigate the potential of small price incentives for inducing substitution to healthier alternatives. We exploit a pricing pattern particular to milk in the US, whereby prices in some geographical regions are flat across Whole, 2%, 1% and Skim milk; while in other regions they are decreasing with the fat content level. The prevailing price structure is determined at a chain and regional level, and is independent of local demand conditions. This exogenous variation in price structure provides a quasi-experimental setup to analyze the impact of small price differences on substitution across fat content. We use detailed demographics to evaluate price sensitivity and substitution patterns for different socio-economic groups. Results show that small price differences are highly effective in inducing substitution to lower calorie options. The impact is highest for low-income households who are also most at-risk for obesity. Our results suggest that a selective taxation mechanism that lowers the relative prices of healthier options can serve as an effective tool to combat obesity.