Tag: imperfect information

Are consumers ‘rational’ is the sense of trying to maximise consumer surplus? In some circumstances the answer is yes. When we go shopping we do generally try to get best value for money, where value is defined in terms of utility. With limited incomes, we don’t want to waste money. If we were offered two baskets of goods costing the same amount, we would generally choose basket A if its contents gave us more utility than basket B.

So why do we frequently buy things that are bad for us? Take the case of food. Why do we consume junk food if we know fresh produce is better for us? To answer this we need to look a little closer at the concept of utility and what motivates us when we consumer things. The following article does just that. It reports on writings of Michael Pollan. Pollan looks at our motivation when choosing what and how much to eat. For much of the time our choices are governed by our subconscious and by habit.

“Millions of humans, while believing they govern their actions with conscious intelligence, clean every morsel from their dinner plates, mainly because their parents told them to. And we do this even if we don’t particularly like the food on the plate and even if we know we should be eating less of it. Unthinkingly, we follow a habit we would condemn if we looked at it clearly.”

You mar what you eat and the politics of Michael Pollan National Post (Canada), Robert Fulford (18/1/10)

Questions

  1. What is meant by ‘rational behaviour’? Is it reasonable to assume that people are rational in most circumstances?
  2. Is eating junk food consistent with the attempt to maximise consumer surplus?
  3. How relevant is the principle of diminishing marginal utility in explaining the amount of junk food we eat?
  4. To what extent are the problems that Pollan identifies examples of (a) imperfect information; (b) irrationality?
  5. What does people’s eating behaviour reveal about their preferences for the present over the future and hence their personal discount rate?
  6. What are the policy implications of Pollan’s analysis for governments trying to get people to eat more healthily?

The US Institute of Medicine of the National Academies has recently published a 92-page on report on childhood obesity and the use of taxes on junk foods to tackle the problem. In the report, titled Local Government Actions to Prevent Childhood Obesity, “a panel of experts suggested such taxes could play an important role in helping children make healthier eating choices”.

Meanwhile, in Australia, the Federal Government’s preventive health taskforce argued, amongst other things, that “junk food advertising should be phased out, the cost of cigarettes should be more than $20 a packet, and soft drinks and cask wine should be hit with higher taxes”.

So how effective are higher taxes in achieving a reduction in ill health associated with eating, drinking and smoking? If adopted, what is the socially optimum design and rates of such taxes? What other complementary policies could be adopted? The following articles consider the issues.

More support for a junk-food tax Los Angeles Times (2/9/09)
Tax junk food, drinks to fight child obesity-report Reuters (31/8/09)
Could Raising Taxes on Junk Food Curb Obesity? eMaxHealth (2/9/09)
Junk food and tobacco under fire The Age (Australia) (2/9/09)
What price health? The Australian (2/9/09)

Questions

  1. For what reasons does the free market fail to achieve an optimum level of consumption of junk foods, alcohol and cigarettes?
  2. How would you determine the socially optimum level of consumption of such products?
  3. How are the price, income and cross-price elasticities of demand, and the price elasticity of supply, relevant to assessing the effectiveness of taxes for reducing the consumption of unhealthy products?
  4. What determines the incidence of taxes on unhealthy products?
  5. What other policies would you advocate to tackle the problems associated with consuming unhealthy products? How would they affect the price elasticity of demand for such products.
  6. To what extent do the objectives of social efficiency and equity conflict when designing appropriate policies to discourage unhealthy consumption?