Question

1. The average weight of American adults increased by about 10 pounds in the 1990s. In November 2004, it was reported that U.S. airlines spent $275 million more in fuel costs to transport this additional weight. a. If airlines must spread out the cost of transporting obese people over all passengers, including those who are slim, would this increased cost be an externality of obesity? Assume that obesity does impose a negative externality and the main cause is high sugar intake, use a demand and supply model to illustrate the market outcome and the socially optimal outcome. Consider three policy options: 1) a sugar consumption tax, 2) a regulation requiring restaurants to display calories on their menus, and 3) Banning soda and junk foods from public school cafeterias, illustrate the effect of each policy with a demand and supply model. Discuss the efficiency and equity implications for each policy b. c.

Answer 1

a) if airlines must spread out the cost of transporting obese people over all passengers including those who are slim this would definitely create negative externality for the thin people because now they have to bear the extra cost for the extra weight that they dont even have.

b) if we are assuming that obesity does impose a negative externality and the main cause is sugar then the social marginal cost of sugar will be much higher than the private cost of sugar so here the market outcome will be much below the private outcome. the graphical representation will be much clearer here.

c) a sugar consumption tax will increase the price of sugar and sugar related product which will ensure less consumption of sugar by people and so it is a more efficient policy to internalise externality. in case of the regulation regarding display of calories in menue or by putting ban in soda and junk food it is not essentially make people consume less sugar and will not be an efficient tool to check obesity. but the second and third method are more equitable than sugar tax. sugar tax will put extra presure on those who are not in group of obesity.