High fixed costs for retailing fresh fruit and vegetables mean they cost 40% more than is efficient, unlike unhealthy alternatives, which trade close to marginal cost, a new study shows.
Introducing subsidies to prevent price distortions and reduce the price of fruits and vegetables would change diets that are not only healthier but more in line with what consumers prefer to eat, according to research.
Published today (March 30). Science advancesResearch by economists at the University of Warwickset quantifies the distortions in fruit and vegetable prices caused by market imperfections and their impact on our eating habits.
Economists have found that fixed costs in the supply chain play a much larger role in fruit and vegetable prices than other food prices, distorting relative prices by at least 40%. These higher prices mean that consumers buy 15% less fruit and vegetables on average than if they were sold at marginal cost. This low cost is due to market imperfections: fixed costs prevent the ‘invisible hand’ of the market from allocating more fruits and vegetables to consumers, which both they and the producers of these products would prefer.
A 15% underconsumption of fruits and vegetables due to retail market imperfections accounts for one third of the gap between average and recommended intakes of fruits and vegetables.
Professor Thijs van Rens, one of the authors of the article, also leads the Warwick Obesity Network, which produces practitioner briefs supporting evidence-based policy and a national strategy against obesity. He said: “The food retail market is very competitive, so if there was no fixed cost you would expect the food to sell close to marginal cost. And the fact that they don’t affect food.
“A higher price of any product means people are buying less of it. The question is, how much? We found that if the market were working properly, consumers would buy 15% more fruits and vegetables than they currently do, which would constitute a huge public health gain.
“There is something wrong with the market, which is a high fixed cost in the supply of fruit and vegetables. The effect is that prices are too high and consumption is too low. What’s worse: the effect is strong when demand is low. And where people are poor, demand is low. So this Market failure not only makes us all unhealthy, it also increases health inequalities.”
The shelf price of a product includes the fixed costs associated with its production and distribution. Fruits and vegetables have particularly high fixed costs because they are perishable products that require them to be replenished more frequently. This raises the price of fresh produce relative to other, less healthy, foods, which are sold near their marginal cost.
To investigate its effect on consumer fruit and vegetable purchases, economists have modeled the consumption behavior of households with different incomes, living in neighborhoods with different average income levels. They used U.S. food purchase data from the NielsenIQ HomeScan dataset, which contains detailed information on food purchase volumes and prices for nearly 60,000 households between 2004-2014, to determine how much a consumer pays for fruits and vegetables. Their preference over quantity and quality of fruits and vegetables and how much due to this specific cost.
Economists argue for up to 25% fruit and vegetable subsidies to increase fruit and vegetable consumption and make our diets healthier. It is estimated that UK supermarkets sold around £10.4 billion worth of fresh produce in 2017, so they estimate that a subsidy would cost the government £2.5 billion per year.
The NHS spent £6.1 billion on overweight and obesity-related illnesses in 2014/15 and is estimated to potentially spend £9.7 billion by 2050, with the overall cost of obesity to wider society estimated at £27 billion.
Professor van Rens added: “Taxes and subsidies to tackle obesity have been politically impossible for some time but should no longer be. Obesity is a huge public health problem and we’re not going to solve it by changing it. We have to bring it. Beyond the big guns: subsidies and taxes . A subsidy is in some ways the most market-based, least invasive intervention you can think of. Anything less than just giving friendly advice and not getting us where we need to be.
“There’s no dispute that you subsidize fruit and vegetable consumption. The key contribution of our research is to show that markets are already so distorted that these subsidies benefit every single consumer in the economy.”