The problem of obesity and healthy eating is a growing problem in many countries and governments have long been looking into designing policy to tackle this issue.
Some have gone for healthy eating campaigns and policies to encourage pregnant women to eat better, but one government took it a step further and introduced a Fat Tax. In October 2011, the Danish government introduced a tax on foods that are high in saturated fat in a bid to reduce consumption of these goods. However, this policy is now to be abolished.
The Fat Tax introduced by the government imposed a surcharge on foods that contained more than 2.3% saturated fat. Numerous products were affected, including meats, dairy and as expected – processed foods. The policy was criticised by scientists who said that saturated fat was the wrong target and perhaps they were proved right, but the government’s u-turn, which will now see the tax being abolished. The tax had gradually increased food prices throughout the country and authorities said that it had even put Danish jobs at risk.
With food prices much higher in Denmark with the tax, consumers switched from buying domestically produced goods to crossing the border into Germany and purchasing their cheaper food. This undoubtedly had an adverse effect on the Danish economy, as it represented a cut in consumer expenditure. Perhaps it also helps to explain Germany’s strong economy – it was feeding 2 nations! The Danish tax ministry said:
‘The fat tax and the extension of the chocolate tax — the so-called sugar tax — has been criticised for increasing prices for consumers, increasing companies’ administrative costs and putting Danish jobs at risk … At the same time it is believed that the fat tax has, to a lesser extent, contributed to Danes travelling across the border to make purchases … Against this background, the government and the (far-left) Red Green Party have agreed to abolish the fat tax and cancel the planned sugar tax’
Once the tax is abolished, other policies will need implementing to tackle the problem of obesity and encourage healthy eating, as it continues to be a big problem in this and many other countries. The following articles consider this problem.
Denmark to scrap world’s first fat tax Associated Press (10/11/12)
Denmark to abolish tax on high-fat foods BBC News (10/11/12)
Fat tax repealed The Copenhagen Post (10/11/12)
Businesses call fat tax a failure on all fronts The Copenhagen Post, Ray Weaver (10/11/12)
Questions
- Illustrate the effect of a tax being imposed on a diagram. What happens to equilibrium price and quantity?
- According to Danish authorities, consumers didn’t change their consumption habits with the tax. What does this suggest about the PED of these products?
- How does the amount of tax revenue generated vary with the price elasticity of demand and supply?
- What other policies could be implemented to encourage healthy eating?
- Why did this fat tax lead to higher food prices?
- Explain the way in which such a tax could adversely affect the Danish economy. Does this justify its removal?
European wine producers have seen one of the worst grape harvests for decades. With exceptionally wet weather in the northern European growing areas and exceptionally hot and dry weather in the southern ones, yields are well down in most countries.
In France, the world’s largest wine producer, wine production is forecast to be 19% down on the previous year. In Italy and Spain, Europe’s second and third largest producers, production is forecast to be 3% and 6% down respectively. Production in the EU as a whole, which produces some 57% of world output, is expected to be 9% down and at a historically low level. What is more, the past five years in the EU have all seen modest harvests.
And the poor harvests are not confined to Europe. Argentina’s production is some 24% down on 2011, with New Zealand’s 17% down. And despite a few countries expecting an increase, including the USA and Chile, overall world production is expected to be 6% down on 2011 and more than 7% down on the average for 2008–11.
So is this good news or bad? At first sight it would seem to be bad, especially for the countries with large falls in output. It would also seem to be bad news for the consumer, with prices set to rise.
But for some it’s good news. If prices rise, then producers experiencing an increase in output will have a double gain. And a fall in output is only part of the story. For some producers, the smaller yield has been accompanied by an increase in quality. And then there’s the question of stocks. For several years, global production of wine has exceeded consumption. Indeed the gap widened after the financial crisis and recession of 2007–9 as consumption of wine fell. This year’s poor global harvest should help to slow down the increase in stocks or may even lead to a reduction in stocks, depending on the extent to which demand recovers.
Articles
World Wine Output to Fall to 37-Year Low, Depleting Stocks BloombergBusinessweek, Rudy Ruitenberg (30/10/12)
World wine drought after weather ruins harvests The Telegraph, John-Paul Ford Rojas (31/10/12)
Wine Experts: Drought, Cold Bring Worst Harvest in 50 Years Skye (30/10/12)
Wine experts: worst grape harvest in half century Washington Examiner (17/10/12)
Small 2012 harvest sparks supply fears thedrinksbusiness.com, Gabriel Savage (30/10/12)
Wine shortage to follow poor 2012 grape harvest BBC News (31/10/12)
Hot summer cools business prospects for Madrid vintners BBC News, Jaime Gonzales (24/9/12)
World awash in wine, so Europe’s poor grape harvest won’t hit Edmonton goblets just yet Edmonton Journal, Dan Barnes (17/10/12)
Data
Wine in figures Wines from Spain
2012 global economic vitiviniculture data Wines from Spain (Note that the countries in Table 1 have been entered in the wrong order.)
Questions
- Illustrate the effect of the global wine harvest on a demand and supply diagram.
- Will a fall in grape production of x per cent lead to a rise in the price of wine of more or less than x percent? How is the price elasticity of demand relevant to your answer?
- What elements are there in the supply chain from planting vines to consuming wine?
- How does the holding of stocks affect (a) the profitability of wine production; (b) the price volatility of wine?
- The Greek grape harvest is predicted to be higher in 2012 than in 2011. How will this affect the prices of Greek wines in (a) Greece; (b) outside Greece?
- How is the fallacy of composition relevant in assessing the benefits to owners of vineyards of a good grape harvest?
10 of the 17 eurozone countries have agreed to adopt a financial transactions tax (FTT), often known as a ‘Tobin tax’ after James Tobin who first proposed such a tax back in 1972. The European Commission has backed the proposal, which involves levying a tax of 0.1% on trading in bonds and shares and 0.01% on trading in derivatives.
The 10 countries, France, Germany, Austria, Belgium, Greece, Italy, Portugal, Slovakia, Slovenia and Spain, and possibly also Estonia, hope to raise billions of euros from the tax, which will apply whenever at least one of the parties to a trade is based in one of the 10 (or 11) countries.
On several occasions in the past on this site we’ve examined proposals for such a tax: see, for example: Pressure mounts for a Tobin tax (update) (Nov 2011), A ‘Robin Hood’ tax (Feb 2010), Tobin or not Tobin: the tax proposal that keeps reappearing (Dec 2009) and A Tobin tax – to be or not to be? (Aug 2009). Tobin taxes are also considered in Economics (8th ed) (section 26.3) and Economics for Business (5th ed) (section 32.4).
As we noted last year in the blog Is the time right for a Tobin tax?, the tax is designed to be too small to affect trading in shares or other financial products for purposes of long-term investment. It would, however, dampen speculative trades that take advantage of tiny potential gains from very short-term price movements. Such trades account for huge financial flows between financial institutions around the world and tend to make markets more volatile. The short-term dealers are known as high-frequency traders (HFTs) and their activities now account for the majority of trading on exchanges. Most of these trades are by computers programmed to seek out minute gains and respond in milliseconds. And whilst they add to short-term liquidity for much of the time, this liquidity can suddenly dry up if HFTs become pessimistic.
Supporters of the tax claim that it will make a major contribution to tackling the deficit problems of many eurozone countries. Critics claim that it will dampen investment and growth and divert financial business away from the participating countries. The following articles look at the arguments.
EU Commission backs 10 countries’ transaction tax plan Reuters, Jan Strupczewski (23/10/12)
EU ‘Robin Hood’ tax gets the nod fin24 (23/10/12)
European financial transaction tax moves step closer The Guardian, Larry Elliott (23/10/12)
Financial transaction tax for 10 EU states BBC News (23/10/12)
Rejecting a Robin Hood tax would be a spectacular own goal The Guardian, Max Lawson (11/10/12)
More than 50 financiers back Robin Hood Tax The Robin Hood Tax (23/10/12)
Topical Focus – Transaction Taxes Tax-News (23/10/12)
Could a transactions tax be good for capitalism? BBC News, Robert Peston (3/10/11)
A Tax to Kill High Frequency Trading Forbes, Lee Sheppard (16/10/12)
Questions
- Explain how the proposed financial transactions tax will work.
- Why would many parties to trades who are not based in one of the 10 participating countries still end up paying the tax?
- What are likely to be the advantages and disadvantages of the proposed tax?
- Is it appropriate to describe the proposed FTT as a ‘Robin Hood Tax’?
- How does a financial transactions tax differ from the UK’s stamp duty reserve tax?
- Explain why the design of the stamp duty tax has prevented the flight of capital and trading from London. Could a Tobin tax be designed in such a way?
- What are HFTs and what impact do they have on the stability and liquidity of markets?
- Would it be desirable for the FTT to ‘kill off’ HFTs?
Induced hydraulic fracturing or “fracking”, is a technique used to make fractures in shale beds, normally deep underground, through the injection of liquids under high pressure. The idea is to release oil or gas. Fracking has transformed the oil industry by allowing vast reserves to be tapped.
Although the main ingredient of the fracking liquid is water, it is also necessary to include sand and a gelling agent to increase the viscosity of the liquid and bind in the sand. The commonest gelling agent is guar gum, a gel made from powdered guar seeds, which are grown in the semi-desert regions of India and Pakistan. Guar gum is also widely used in the food industry as a binding, thickening, texturising and moisture control agent.
With the rapid growth in fracking, especially in the USA, the demand for guar gum has rocketed – and so has its price. In just one year the price of guar beans, from which the seeds are extracted, has risen ten fold from about 30 rupees (about 34 pence) to around 300 rupees per kilo. This has transformed the lives of many poor farmers. Across the desert belt of north-west India, fields are being planted with guar.
But will it last? What will the oil and gas extraction companies do in response to the higher price? What will the food industry do? What will happen to the demand and supply of guar gum over the longer term? Is it risky for farmers in India and Pakistan to rely on a single crop, or should they take advantage of the high prices while they last? These types of questions are central to many mono-crop economies.
Webcast
The little green bean in big fracking demand CNN, Mallika Kapur (10/9/12)
Articles
Frackers in frantic search for guar bean substitutes Reuters, Braden Reddall (13/8/12)
After first-half surge, US drillers find respite in guar wars Reuters (20/7/12)
Guar Gum Exports From India to Drop on Halliburton Stocks BloombergBusinessweek, Prabhudatta Mishra (3/9/12)
Frackers Seek Guar Bean Substitutes The Ithaca Independent, Ed Sutherland (13/8/12)
Synthetic Fracking Ingredient to Replace Guar Bean Greener Ideas, Madison E. Rowe (15/8/12)
From emu farms to guar crops: Why the desert is fertile for Ponzi schemes The Economic Times of India, Vikram Doctor (10/9/12)
Guar gum replacer cuts cost by up to 40% Food Manufacture, Lorraine Mullaney (4/9/12)
Less Guar Needed: TIC Gums Introduces Ticaloid Lite Powder TIC Gums (27/8/12)
Immediate Supply of Guar Gum Available in the US PRLog (1/9/12)
Questions
- Why have guar bean, powder and gum prices risen so rapidly? Use a demand and supply diagram to illustrate your answer.
- How is the price elasticity of supply of guar likely to differ between the short term and the long term? What will be the implications of this for guar prices and the livelihood of guar growers?
- How is the price elasticity of demand for guar likely to differ between the short term and the long term? What will be the implications of this for guar prices and the livelihood of guar growers?
- What would you advise guar growers to do and why?
- What is the role of speculation in determining the price of guar?
- What is a ‘ponzi scheme’? Why is the ‘desert so fertile for ponzi schemes’? (Note that the symbol for a rupee is Rs or ₹, that 100,000 rupees are referred to as 1 Lakh and that 100 Lakh are referred to as 1 Crore.)
With droughts and poor harvests in both North America and in Russia and the Ukraine, there are worries that food prices are likely to see sharp rises in the coming months. This is clearly bad news for consumers, especially the poor for whom food accounts for a large proportion of expenditure.
But it’s also bad news more generally, as higher food prices are likely to have a dampening effect on the global economy, struggling to recover from five years of low or negative growth. And it’s not just food prices. Oil prices are rising again. Since mid June, they have risen by nearly 25%. This too is likely to have a dampening effect.
Another contributing factor to rising food prices is a response, in part, to rising oil prices. This is the diversion of land from growing food to growing crops for biofuels.
G20 countries held a conference call on 28 August to discuss food prices. Although representatives decided against an emergency meeting, they agreed to reassess the situation in a few weeks when the size of the US harvest would be clearer. If the situation proved as bad as feared, then the G20 would call an emergency meeting of the Rapid Response Forum, to consider what could be done.
But is the sole cause of rising food prices a lack of production? Are there other problems on the supply side, such as poor distribution systems and waste? And what about the role of demand? How is this contributing to long-term increases in food prices? The articles consider these various factors and what can be done to dampen food prices.
Articles
G20 points to ‘worrying’ food prices Financial Times, Javier Blas (28/8/12)
US food prices to surge on drought Gulf News(30/8/12)
Best to get used to high food and energy prices – they’re here to stay The Telegraph, Jeremy Warner (29/8/12)
Feeling a drought The Economist (14/8/12)
Q&A: World food and fuel prices BBC News (14/8/12)
G20 considers global meeting as food prices rise BBC News (28/8/12)
Biofuels and Food Prices (direct link) BBC ‘In the Balance’ programme (25/8/12)
U.N. body urges G20 action on food prices, waste Reuters, Patrick Lannin (27/8/12)
Ethanol industry hits back over food price claims EurActiv (28/8/12)
The era of cheap food may be over Guardian, Larry Elliott (2/9/12)
Data
Food Price Index Index Mundi
Questions
- Why have food prices been rising in recent weeks?
- Use a demand and supply diagram to demonstrate what has been happening to food prices.
- What determines the price elasticity of demand for wheat? What might this elasticity vary over time?
- What is the role of speculation in determining food prices?
- Illustrate on an aggregate demand and supply diagram the effect of a commodity price shock. What is likely to be the policy response from central banks?
- What determines the price elasticity of supply of food in (a) the short term and (b) the long term?
- What determines the cross price elasticity of supply of food to the price of oil? Is the cross price elasticity of supply positive or negative?
- What can governments do to reduce food prices, or at least reduce food price inflation?
- What benefits may come from higher food and fuel prices over the longer term?
The problem of obesity and healthy eating is a growing problem in many countries and governments have long been looking into designing policy to tackle this issue.
