Economics of Nutrition

The Economics Of Information Policy

A second type of public policy intervention to address nutrition concerns is to seek to influence the information environment in which consumers make food-related decisions. For example, governments may seek to promote nutrition through dietary guidance, regulation of food labeling, and regulation of advertising. Private mechanisms that affect quality include brand names and reputation as well as standard setting.

Information policies may be classified on a spectrum, running from mandatory information, to voluntary information provision chosen freely by the producer, to voluntary information with restrictions imposed by the government, to outright prohibitions against a particular type of information provision. This spectrum is shown in Figure 2 (adapted from Wilde (2013)).

Economics of Nutrition Figure 2

At each point along this spectrum, the policy debate depends in part on what one believes are the real facts about the relationship between food decisions and health. Some information sources recommend diets that are low in carbohydrates; some recommend diets that are low in fat and high in plant foods; some say humans as omnivores can thrive on either of these diets so long as we avoid highly processed manufactured foods. In the United States, the federal government’s ‘Dietary Guidelines for Americans,’ issued every 5 years, recommend a diet with plenty of fruits, vegetables, whole grains, and low-fat dairy products, within the context of an overall diet that maintains a healthy weight by balancing total energy intake with energy expenditure needs. In promulgating dietary guidelines, the government seeks to remedy some of the confusion in private-sector information markets by identifying dietary principles that are supported by the balance of the scientific evidence.

There is comparatively little need for government regulation of food labeling and advertising for food attributes such as taste, which can be confirmed by search and experience, because correct information about such attributes is readily available to the consumer. The government has a more substantial role in regulating claims about nutrition and health qualities, which are credence attributes.

Yet, even for credence attributes, markets sometimes function well on their own. Even before nutrition facts panels became mandatory in the early-1990s, many food products carried nutrition information voluntarily. One might at first suspect that only the healthiest products would provide nutrition information, but competitive pressure may force a wider range of products to disclose information. Once consumers catch on that nondisclosure indicates that a product lacks a healthful characteristic that competitors have, there is an incentive for all but the least healthy products to disclose information voluntarily. This theory of competitive information disclosure works better in some situations than in others. For example, if all products in a food category share a certain characteristic, such as the dietary cholesterol in eggs, there is no incentive for companies to advertise the shortcomings of their competitors.

Regulation Of Food Labeling

US food labeling policies include rules that mandate some kinds of information provision and rules that prohibit other kinds. In the first half of the twentieth century, the US federal government established standards of identity for many food products and began requiring disclosure of net weights and ingredients for manufactured food and beverages. Nutrition facts panels were introduced on a voluntary basis in the 1970s and became more widespread during the 1980s. Since the passage of the 1990 Food Labeling and Education Act (NLEA), nutrition facts panels have been mandatory on most packaged food in the United States. More recent legislation has required mandatory country-of-original labeling (COOL) on a wider variety of food products. The 2008 Farm Bill for the first time required disclosure of calorie information in chain restaurants. Bollinger et al. (2011) look at the effects of a policy in New York City requiring chains to post calories for food on purchases at Starbucks, finding that average calories per transaction fell, and this was through changes in purchases of food, not beverages.

Until the 1980s, the Food and Drug Administration (FDA) generally refused to permit health claims on food labels, fearing that consumers would be misled. The 1990 NLEA allowed health claims on food labels if there is ‘significant scientific agreement’ about the merit of the claims. For example, many low-sodium products may use a health claim that reducing sodium can lower high blood pressure.

Subsequent legislation and court cases have forced the FDA to allow a broader range of claims. The 1994 Dietary Supplement and Health Education Act (DSHEA) led to a weaker standard of evidence for what are called structure–function claims, which do not mention a specific disease as health claims do. For example, ‘calcium builds strong bones’ is a structure–function claim. More recently, in response to a successful lawsuit about health claims on dietary supplements, the FDA has begun to allow health claims for which the evidence is not strong enough to quality as significant scientific agreement, so long as the food package label includes a disclaimer describing the level of scientific evidence for the claim.

Remedies for the problem of misleading claims may come from the private sector, the government, or both in combination. The for-profit media frequently cover food issues, describing recent research in nutrition science and food safety. Private not-for-profit organizations also can serve as independent watchdogs. In some cases, government agencies can take steps to share information more widely, thereby allowing private sector market incentives to function better. Jin and Leslie (2009) study the question of reputational incentives through the example of restaurant hygiene. Using data from Los Angeles County, they find that reputational incentives indeed provide a market-based mechanism for quality, but that quality increased further when the government-issued hygiene report cards for restaurants.

In one business model, not-for-profit organizations and for-profit businesses may offer third-party certification of nutrition labeling claims made by food companies. For example, in return for a fee paid by food companies, the American Heart Association (AHA) allows food manufacturers to label qualifying products with an AHA heart-check symbol certifying that they are low in saturated fat and cholesterol or high in whole grains. In still other cases, the government helps set standards for a food label claim, which then may be used voluntarily by private-sector businesses that meet the standard. For example, the ‘certified organic’ label may only be used on foods that meet a checklist of process standards, which exclude the use of certain chemicals and practices in agricultural production and food processing. Qualifying food producers choose voluntarily to produce food organically. Food retail chains have considerable influence over the adoption of voluntary food labeling strategies. If a retailer with a large market share increases its marketing of certified organic products, or develops a new front-of-pack nutrition label, these decisions influence decisions by food manufacturers and other suppliers throughout the food marketing chain.

The Economics Of Food Advertising

Under perfect competition, producers of a standardized commodity have less incentive to advertise, because each firm’s investment in advertising would reap gains in consumer demand that are shared with all of the firm’s competitors. Each perfect competitor would have an incentive to be a ‘free rider,’ allowing competitors to bear the cost of advertising. Clearly, this model of industry structure does not provide a compelling description of the food and beverage manufacturing industries or the chain restaurant industry, where heavy advertising is widespread.

Instead, a model of industry structure that better describes these industries is monopolistic competition. In this model, each firm is the monopoly producer of its own branded product, and it competes to a certain degree with competitors who are similar. Competitors may be similar because they are physically nearby, as in the case of local food retailers who compete most strongly with other firms that are geographically close. Competitors also may be similar in a psychological sense, as in the case of quick-service restaurants that serve a similar clientele and occupy a similar marketing space. Under monopolistic competition, firms have a strong incentive to advertise.

Determinants of Mental Health
Peer Effects in Health Behaviors