2009-2010 Essay Contest

What economic factors may be contributing to the problem of obesity, and how can economics be applied to address the problem?

Economics of Obesity

For almost all of the human past, the prospect of starvation was a real threat to most people. While scarcity is still the pervasive fact of economics, modern industrial economies have an abundance of low-cost food. As a result, the United States and other countries have seen an increase in rates of obesity.

Obesity posterObesity is a medical condition in which excess body fat becomes a health threat. This can have such adverse consequences as higher rates of heart disease, diabetes, cancer and stroke. In addition, some claim that increasing obesity rates inflict costs on the rest of society as well. For this reason, there might be a case for public action to reduce obesity.

The Minneapolis Fed has decided for its 22nd Annual Student Essay Contest to ask the question, “What economic factors may be contributing to the problem of obesity, and how can economics be applied to address the problem?”

Essays can explore why obesity has increased, and what sorts of policies (if any) can combat this increase. What follows is a summary of some, but not all, economic aspects of obesity.

Market Failure

If behavior that leads people to become obese affects only the individuals making those decisions, the economic case for a public policy response isn’t very compelling. After all, these are purely private actions, and they don’t differ from other decisions people make about what activities to participate in or products to purchase.

However, some private decisions can have negative public effects. In the case of obesity, some analysts argue that because such problems create higher demand for some health care services, they create added costs for all health care services. These “spillover costs” end up getting paid by everyone, whether or not they are obese themselves (similar arguments are also made about smoking). These social costs, which economists call externalities, are a case of market failure.

In practice, however, these costs can be difficult to quantify. If you want to make the argument for public action on obesity due to spillover costs, be prepared to provide some evidence on those costs.

Information

Economists believe markets generally allocate resources efficiently. However, this efficiency requires that participants in markets have adequate information to make the best decisions. If consumers don’t have good information, there might be a role for government intervention.

This is why there are laws on nutrition labeling and product safety. However, the rise in obesity might indicate that such regulations are not working adequately. Perhaps you could suggest other ways in which public action could improve the quality of information consumers have in making their health decisions.

Incentives

Economics is about incentives—the factors that motivate people to make the decisions they do. Incentives underlie how people respond to lower costs of food and reduced need for physical activity, which contribute to obesity. But incentives can also be harnessed in responding to that rise.

When people propose solutions to the obesity problem, such as lower health insurance premiums for going to the gym or putting taxes on junk foods, what they are really talking about is changing the incentives people face. If you want to put forward your own proposal for combating obesity, you must talk about how that proposal would affect incentives, and thereby decisions.

Unintended Consequences, Costs and Benefits

One key lesson in economics is that well-intentioned policies often have unintended consequences. The obesity problem provides an illustration of this.

The U.S. government provides subsidies to farmers of numerous crops, particularly corn and other grains. The intent of these subsidies is to reduce the risk farmers face from sudden decreases in prices for their products. However, subsidies also have the consequence of making some kinds of food more plentiful and available than others. Some research has pointed to these policies as a cause of increasing obesity.

Likewise, a policy intended to combat obesity may have other consequences from altered incentives. An analysis of any policy must try to take all these costs into account and weight them against the policy’s benefits.

Be Creative

Problems like obesity are complicated, and trying to figure out the best ways to address them, or even determining whether they should be addressed at all, requires creativity.

Creative essay topics will receive special attention, so put some time into thinking up an original angle. Maybe you will come up with an angle that hasn’t occurred to anyone yet. But whatever you decide to write about, make sure you keep your basic economic principles in mind. Good luck!


If you have any questions, contact Joe Mahon at Joseph.Mahon@mpls.frb.org or call 612-204-5254.

 
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