Price is an important determinant of food choices and diet. 8 Economic theory predicts that as the price of an item rises the consumption of that item will typically fall. Increasing the price of unhealthy foods, by taxation, should reduce consumption of the taxed foods. Observational data suggest that food consumption is relatively insensitive to price changes, the proportional change in consumption being less than the proportional change in price. 9 10 11 12
Moreover, when the price of one good rises, consumption of some goods that are co- consumed will fall and consumption of other goods (substitutes) rise. How much consumption changes in response to price is described by price elasticity values—that is, the percentage change in consumption for a one percentage change in price. The balance of these overall effects, as well as the health benefit of food items, will determine the overall health effect of any health related food tax. Economists generally agree that government intervention, including taxation, is justified when the market fails to provide the optimum amount of a good for society’s wellbeing. The argument has been applied for alcohol and tobacco.
Suggested market failures for food include a failure to appreciate the true association between diet and disease, time inconsistency (preference for short term gratification over long term wellbeing), and not bearing the full health and social costs of consumption.13
Evidence on the effectiveness of health related food taxes comes from three sources: natural experiments, controlled trials of price changes in closed environments, and modelling studies.
Natural experiments may provide the most convincing evidence of effect, but it can be difficult to tease apart the effects of other factors on any