Wednesday, September 23, 2009

"Sin" taxes Vs "Yuck" ads!

Public health experts across the world have been concerned at the increasing consumption of sugary soft drinks and holds it partly responsible for the increased incidence of obesity, high blood pressure and heart diseases. Accordingly, policy makers have been relying on two main approaches to reduce the consumption of these beverages - awareness creation through ("Yuck") advertisement campaigns and soda (or sin) taxes.

I have already posted earlier here and here about the benefits of an obesity tax on such foods. The New York City has been running high-visibility anti-soda advertisements that repulsively illustrates the harmful effects of these sugary beverages. And taking cue from how cigarette taxes have helped curb smoking, the Obama administration is considering imposing a soda tax on soft drinks, energy drinks, sports beverages and many juices and iced teas.

While public health specialists support these efforts, economists have been more ambivalent in their responses. Liberatarian paternalists, following the lessons from behavioural psychology, strongly advocate such ad-campaigns and taxes as efforts to nudge people away from consuming these beverages. There are others who argue that taxes will help internalize the external costs imposed by obesity and other harmful effects on health - increased burden on government health care systems (Medicare/Medicaid), social contagion effects of obesity etc. However, libertarian opponents, who favor respect for individual decision-making, argue that people drink beverages because of the utility and pleasure they derive from its consumption. Accordingly, they strongly oppose any government intervention in advising them about what is good for their health.

The case in favor of atleast some form of restraints on consumption of beverages is well established and needs no reiteration. In any case, whatever the arguements against public paternalism and protection of individual's right to indulge himself (to destruction and death if he so desires), the net economic cost inflicted on the society by these individual actions are too large to be ignored. One man's liberty stops where it starts adversely affecting another man's (or society's) liberty.

In the scale of liberty, awareness campaigns are surely on the liberatrian side while taxes would appear to verge on paternalism. However, I am inclined to side with Edward Glaeser in favoring paternalism as the more efficient form of controlling consumption of sugary beverages. Both taxes and instrusive and unpleasant ads seeks to internalize the external costs of consuming these beverages by making it costlier for the consumer. But while the former involves collection of the costs in the form of tax revenues, the latter option ends up dissipating the costs.

In other words, as Prof Glaeser writes, "An effective ad that makes drinking soda less psychologically pleasant is essentially a tax without revenues... The case for taxes and against ads is that if we are going to impose costs on cola drinkers, it is better to get some revenue back." And also, from the experience of the efforts to curb smoking, the "bigger decreases in smoking followed big increases in the tax on cigarettes".

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