Want people to eat more healthy, fresh fruits and vegetables? Then subsidize these products, new research says.
High fixed costs associated with the retailing of fresh fruit and vegetables increase their final cost by around 40% more than the most efficient price. This, in turn, reduces the consumption of such goods by around 15%, according to a new estimate. In light of the growing public health issue that is the obesity epidemic in the developed world, the authors call for subsidies to make fresh produce more affordable in order to allow more people better access to these healthy foodstuffs.
“There is something wrong with the market, which is that there’s a high fixed cost in the provision of fruits and vegetables. The effect of that is that the prices are too high, and consumption too low,” says Professor Thijs van Rens from the University of Warwick, one of the authors of the article, and leader of the Warwick Obesity Network.”A higher price of any product means that people buy less of it. The question is, by how much? We find that if the market were working correctly, consumers would buy 15% more fruit and vegetables than they currently do, which would constitute a huge gain for public health.
“The food retail market is very competitive, so if there weren’t any fixed costs you would expect food to be sold close to marginal cost. And the fact that they are not affects diets”.
Fixed costs are costs that do not change when more or less of a product is sold. In the case of fresh fruits and vegetables, one example of fixed costs would be the refrigerator units where the produce is stored pending sale. Whether one apple is sold on a particular day, or one thousand, the operation of the refrigeration room would cost the same.
For the findings, the team modeled the consumption behavior of households with different incomes in neighborhoods with various average income levels. Data on the quantities and prices of food purchases between 2004-2014 from about 60,000 households in the United States was obtained from the NielsenIQ Homescan dataset; these were used to determine what an average customer pays for fruits and vegetables, and how these purchases are impacted by the availability or quality of fruits and veggies, and how much by fixed costs.
They found that fixed costs in the supply chain of fresh fruits and vegetables play a much larger role in the final price the consumer pays for these items compared to other foods. All in all, fixed costs increase the relative price enough to make them 40% more pricey than they would be in an efficient market. Unhealthy alternatives such as highly-processed foods, meanwhile, trade very close to their marginal cost, making them more economically attractive for customers.
“What is worse: the effect is stronger when demand is low. And demand happens to be low where people are poor. So this market failure not only makes us all unhealthier, but it increases health inequality as well,” adds Professor Van Rens.
Subsidies can help counteract this high price distortion caused by fixed costs, the authors explain. The end effect would be to make fruits and vegetables more accessible to customers, making their diet healthier and opening up new options that are more in line with what consumers want to eat. All in all, the team calculates that subsidies which can counteract the outsized effect of fixed costs on the price of fruits and vegetables would increase consumption of these items by 15%. This would account for one-third of the gap between the recommended intake of fruits and vegetables and the average consumption of such food items.
The high fixed price associated with the manufacture and distribution of fruits and veggies come from the fact that they are highly perishable, requiring special storage conditions and more frequent restocking.
A subsidy of as much as 25% in the value of fruits and vegetables could help counteract this effect and make them much more accessible for average customers. The team estimates that UK supermarkets sold around £10.4 billion of fresh produce in 2017, so a subsidy would cost around £2.5 billion per year. This should be weighed against the costs of inaction, they argue. The National Health Service (NHS) spent an estimated £6.1 billion on overweight- and obesity-related illnesses in 2014/15. This will likely grow to around £9.7 billion by 2050, the team adds, explaining that the overall cost of obesity on British society as of now is estimated at around £27 billion.
“Taxing and subsidizing to tackle obesity has been politically infeasible for some time but shouldn’t be any longer. Obesity is a massive public health problem and we’re not going to solve it with tweaks. We need to bring out the big guns: subsidies and taxes,” says Professor Van Rens. “A subsidy is in some ways the most market-based, least invasive intervention you can think of. Anything less than that is just giving friendly advice and will not get us where we need to be.
“There is no debate that fruit and vegetable consumption would increase if you subsidize it. The main contribution of our research is to show that the market is already so distorted that this subsidy would benefit every single consumer in the economy.”
The paper “How Distorted Food Prices Discourage a Healthy Diet” has been published in the journal Science Advances.