Economics of Nutrition

A Framework For Nutrition Policy Options

Market Outcomes And Market Failures

Economic theory suggests a rationale for society to rely predominantly on private-sector markets to produce and distribute food. At their best, markets can overcome major challenges in motivating economic actors to make socially beneficial production and consumption decisions, while also providing them with the information they need to do so. The traditional economic theory suggests that governments should defer to market outcomes except in specific circumstances of ‘market failure.’ Several market failures that have been suggested as motivations for government will be discussed. In addition, other noneconomic perspectives with influence in food and nutrition policy will be discussed.

Economists focused on nutrition concerns, particularly obesity, have suggested three market failures that could motivate government action.

  • Food choices of children. Most economic theory assumes that consumers are rational adults who can make their own spending decisions. There is a strong justification for government institutions, such as public schools, to promote nutrition for children. (Public health motivations for policies that also affect adults are mentioned below.)
  • Imperfect information. Market outcomes are efficient only if consumers (and other actors) have the information they need to make purchases that satisfy their preference. Consumer preference include nutritional qualities and food safety as well as the more obvious taste qualities of food. Private-sector markets offer plenty of profit incentive for providing food that tastes good, but they may offer an insufficient incentive for providing information about nutrition qualities. Asymmetric imperfect information (discussed in Section Imperfect Information) is a commonly cited justification for government activities that affect the food system.
  • Negative externalities. Market outcomes may not be optimal if there are externalities, where one person’s decisions affect other people’s well-being through nonmarket interactions. One type of interaction comes from the operation of insurance and health programs. For a person who receives health care from the government, the financial costs of illness are paid largely by taxpayers. Even for people who have private insurance, through their employer or by paying their own insurance premiums, financial costs of illness are shared with other people in the same insurance risk pool. It seems possible that insurance markets could reduce the incentive to maintain a healthy weight. However, some economists suggest that labor markets may already partly compensate for variations in insurance costs, by paying some workers more than others, in which case the negative externalities through health insurance markets would be smaller (Bhattacharya and Bundorf, 2009).

There are several additional reasons why food and agricultural markets may not satisfy the traditional assumptions of perfect competition. In some industries, there may be few competing firms. In other industries, such as the seeds for genetically modified food crops, patent rights may give a small number of firms significant market power. In yet other industries, such as food manufacturing and quick service restaurants, the predominant industry structure may be monopolistic competition, where each firm supplies differentiated branded food products and yet must compete to a certain extent with other firms that provide similar products. The authors return to the topic of differentiated products in discussing food advertising in the Section The Economics of Food Advertising.

Imperfect Information

A situation of imperfect information is described as ‘asymmetric’ if the producer knows more about a food product’s attributes than the consumer does. Relevant attributes may include taste, wholesomeness, safety, and nutrition qualities. Under asymmetric information, food product attributes may be classified based on how the consumer learns about the product:

  • For ‘search attributes,’ the consumer can perceive a product’s quality even before purchase.
  • For ‘experience attributes,’ the consumer can discover a product’s quality after purchasing it. Even though it may be impossible to reverse a particular purchase if the product quality was unsatisfactory, the consumer can learn lessons that are useful for future purchases.
  • For ‘credence attributes,’ the consumer relies to a greater extent on information provided by others, including the seller or by a third party.

A single good may have several attributes. For example, a bag of organic carrots may be seen as a search good for a shopper trying to follow the Dietary Guidelines recommendation to consume orange vegetables; the same bag may be seen as a credence good for a shopper seeking organic produce. Common government responses to asymmetric information range from process regulations (such as specifying what additives are safe to use in food) to food-grading systems to labeling rules (discussed in Section Policy Response).

In addition to having imperfect information, consumers may not satisfy the traditional economic theory’s assumptions about rationality. A lively and rapidly growing body of research addresses behavioral economics, including strategies for ‘nudging’ economic actors in the direction of more optimal food choices, without taking away their freedom to make their own decisions (see Section Behavioral Economics: Nudges).

Policy Response

Economists commonly favor government policies that narrowly target a market failure that has been identified. In situations where there is no market failure, such as when well-informed adults freely choose and accept the consequences of unhealthy eating patterns, many economists say there is no need for a government policy response.

In addition to the economic perspective on diagnosing market failures, there are other motivations that strongly influence government policies regarding nutrition and thus are given attention here to help researchers understand ongoing policy debates.

  • A ‘public health’ perspective gives less deference to market outcomes and favors use of a broad range of policies to affect food choices and dietary quality.
  • A ‘consumer activist’ perspective argues that food and beverage companies create a toxic food environment and should be more strongly regulated.
  • A wide variety of ‘producer’ perspectives favor government nutrition policies that promote the interests of particular sectors of the agricultural, food manufacturing, and food retail industries.
  • An ‘egalitarian’ perspective focuses on income or resource inequality as a motivation for government intervention in food and agricultural markets. For example, a motivation for federal food assistance programs is not just nutrition promotion but also poverty alleviation.

Responding to both economic and noneconomic motivations, leading policies and policy proposals fall into four broad categories, discussed in the next four sections: food assistance programs, information policies, direct price interventions such as taxes and subsidies, or government restrictions or subsidies to supply. The authors conclude with a discussion of behavioral economics and nudges.

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