BY ROMAIN WACZIARG – ULCLA ANDERSON PROFESSOR OF ECONOMICS
A battle is brewing over one of my favorite staples: soft drinks.
In New York City, Mayor Michael Bloomberg recently tried to ban restaurants from selling large-sized sodas, citing the public health risk of the sugary drinks. Meanwhile, the Mexican government is considering a tax on soft drinks to discourage their consumption.
As the prevalence of obesity rises in many countries, public policy is intervening to stem the tide. But should we be regulating the consumption of soft drinks? If an individual wants to risk obesity and diabetes by drinking massive amounts of soda, why should policymakers govern that personal choice?
Too often, we as a society seek to intervene against a behavior we dislike – but in doing so, we may run roughshod over individual rights. A free and informed person presumably weighs the personal costs and benefits when deciding to gulp down a gallon of Coca-Cola. So, perhaps we should end the argument here and let folks like me enjoy our soda in peace.
But it’s not that simple. In principle, public-policy intervention can be justified if leaving the free market to its own devices leads to broad social harm: a negative externality. Perhaps soda drinkers do not make well-informed decisions because they aren’t aware of the obesity costs that occur later in life, and consumers may discount the future too aggressively. Parents. Suppose that parents who consume lots of soda influence their kids to do the same, and that these beverages are addictive.
What social consequences could then result from allowing people to freely choose their level of soda consumption? An obvious one is public-health externality. To the extent that people do not bear the cost of their health expenditures, because they rely on private or public insurance, their private actions affect the premiums that the rest of us pay to insurers and the taxes we pay into public-health schemes. In recent decades, health costs like these have comprised a rising share of total health expenditures. The bottom line is that you and I are footing the bill for the health care costs being incurred by the obese. Soda drinkers are essentially free-riding on insurance pools and taxpayers.
On the other hand, obesity can also bring certain economic benefits. As unpleasant as it may sound, obesity can cause premature death – from diabetes, heart disease or other ailments– which can result in savings for publicly-funded retirement programs like Social Security. We must carefully weigh the health costs of obesity against the savings that an early death affords to retirement programs.
Let’s assume we determine that health costs still win out and we decide to regulate soda consumption. What is the best way to go about doing this?
Economists offer a clear answer here: A tax is much better than a ban. A ban is too heavy-handed and discourages consumption from people who receive a net benefit from drinking soda. Moreover, bans can be rife with loopholes, rendering them ineffective. Soda-drinkers in New York, for example, can easily circumvent the new ban by crossing the Hudson River to get their soda fix in New Jersey.
Instead, a tax should be levied at a level that discourages consumption among people who only receive a small net benefit from drinking soda – a benefit smaller than the social harm they cause. Consumers who really enjoy large sodas, and are willing to pay a high price for it, are free to keep enjoying it. A tax is less intrusive in this manner, and offers the advantage of producing revenue that can be spent on socially beneficial endeavors.
Following this rationale, I give Mexico an “A” and New York an “F” for their efforts. But I doubt Mayor Bloomberg truly believed his initiative was an effective public-policy measure anyway. Rather, he saw an opportunity to raise awareness about an important health issue and to encourage people to make better choices for themselves.
And from that standpoint, the soda ban was wildly successful. After all, you and I are still talking about it, and the next time I feel tempted to buy a Coke at Northern Lights, I may just reach for an Odwalla instead.