Obesity and overweight are major public health concerns worldwide. Mexico is not an exception: as per recent estimations, two-thirds of adults and one-third of Mexican children and adolescents are carrying excessive weight (Colchero, Salgado, Unar-Munguía, Hernandez-Avila, & Rivera-Dommarco, 2015). In terms of obesity and diabetes rates, among all the country members of the Organization for Economic Co-operation and Development, Mexico comes second only to the United States (Colchero et al., 2015).
The obesity epidemic cannot be ascribed to one factor; however, it has been established that in the case of Mexico, sugar-sweetened beverages (SSB) play a significant role in shaping Mexicans’ dietary habits and predicting health outcomes. In the last thirty years, the average individual consumption of SSB has increased by 30% (Colchero et al., 2015). On average, a Mexican consumes 163 liters of SSB annually, and SSBs account for as many as 18% of the average daily calorie intake. Since the situation is no longer sustainable, various measures have been introduced.
One of the ways to discourage people from consuming products that are bad for their health is through taxation. Evidence has shown that taxes on SSB can be directly linked to reduced consumption in countries with high rates of obesity and obesity-related diseases (Colchero et al., 2015). In essence, fiscal policies to address the issue mean raising taxes for SSB producers, which, in turn, will result in higher prices for consumers. It is expected that higher prices will discourage consumers from buying SSB as much as they used to, and the new, healthier choices will translate into better health outcomes.
Understanding the mechanics of the described fiscal policies is impossible without the concept of price elasticity. Demand and supply are two major microeconomic concepts covered in this course. Demand can be defined as the amount of product or service that customers are ready to buy at a set price.
The definition of supply is a stock or amount of something (good or service) that a producer has at their disposal, available for use. Economic agents – buyers and sellers – are brought together by the market where they negotiate and make choices that shape demand and supply. Generally, the determinants of demand include the price of substitute goods, the price of complement goods, income, and taste. It is important to understand the concept of elasticity that refers to the responsiveness of demand to price fluctuations (price elasticity) or changes in income (income elasticity).
Price elasticity varies from sector to sector and depends on the type of goods and services. Basic necessities, such as staple foods, that essentially mean survival can have low elasticity. In contrast, it is theorized that SSBs are non-essential goods: they are not absolutely necessary, and consumers can easily eliminate them from their budgets. For this reason, Colchero et al. (2015) expected high price elasticity following the new taxation policies in Mexico.
The researchers utilized retrospective data shared by the Mexican National Institute of Statistics and Geography (INEGI). The surveys take place every two years and collect data on household income level, expenses, household properties as well as socio-demographic and socioeconomic characteristics of their members. The study required modeling a demand system for SSB and other beverages using the Linear Approximation of the Almost Ideal Demand System (LA/AIDS).
The findings of their study, indeed, showed price elasticity for SSB than for soft drinks in general (-1.16 vs -1.06, respectively). It was discovered that low-income households were more willing to reduce or stop SSB consumption following price increases. However, a determinant even stronger than income was the level of marginalization of households. Within this study, marginalization was defined as social exclusion and the relegation to the fringes of a society where people perceive themselves as “outsiders” and are denied power in economic, social, political, or other senses (Colchero et al., 2015). Therefore, the policies might have had the desired effect on the most vulnerable communities.
The question arose as to whether a reduction in SSB meant switching to alternatives that may be as unhealthy as SSBs, in which case high price elasticity would not be a positive phenomenon. It appears that increases in SSB and soft drink prices were linked to greater water and milk expenditures. Colchero et al. (2015) argued that on the one hand, water could be a great substitute because it does not contain calories and is good for health. On the other hand, however, substitution may only be an illusion because households typically did not report potable water consumption. Colchero et al. (2015) found milk an acceptable substitute due to lower sugar contents and higher satiety.
Interestingly enough, soft drinks, such as juices, appeared to be complementary to SSB. A decrease in SSB consumption meant a decrease in the consumption of soft drinks as well. All in all, the article proved the effects of increasing prices for non-essential consumer goods on their consumption. However, high price elasticity for one category of foods can be a positive outcome if it implies switching to healthier alternatives.
Reference
Colchero, M. A., Salgado, J. C., Unar-Munguía, M., Hernandez-Avila, M., & Rivera-Dommarco, J. A. (2015). Price elasticity of the demand for sugar sweetened beverages and soft drinks in Mexico. Economics & Human Biology, 19, 129-137.