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Food Prices: An Overview of Current Evidence

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7. Market failure and food and drink prices

Until the second half of 2007, the UK households have been experiencing decreasing cost of food as a proportion of income. Whilst it can be agued that this has increased the overall quality of life, allowing more to be spend on other goods and services, cheap food can have negative effects. This can happen if low prices result in an over-consumption of food and drink, especially unhealthy food and alcohol with adverse impacts on health and well-being. Over-consumption can also be damaging to the environment, as production and consumption of food contribute to waste and greenhouse gas emissions. All these effects have a social cost attached to them and this can be potentially incorporated into food and drink prices to internalise these costs and make individuals take them into account when they make production and consumption decisions.

Behaviour can be altered either by lowering the financial costs of the desired behaviour, thereby making it absolutely or relatively cheaper or disincentivise undesirable options by making them more expensive. 41 Since over-consumption of food, especially unhealthy food is undesirable, higher prices could act as a disincentive and thus help achieve the more optimal levels and composition of consumption.

7.1 Food as a merit and de-merit good

Benefits of some food products are often unknown or underestimated. For example, many consumers may be unaware of the extent of the positive impacts on health that consumption of fruit and vegetables can have or the nutritional value of products such as nuts and seeds. Such goods are merit goods, as lack of information about their qualities result in their under-consumption, i.e. less is consumed than would otherwise be optimal.

In a similar way, the de-merit good concept can be applied to the consumption of some products, as the costs associated with the consumption of certain products are in some cases not recognised fully. This is often the case with food products high in fat, sugar, salt and artificial ingredients as consumers underestimate the damage to health they can cause. This results in over-consumption which is also suboptimal.

The benefits that are underestimated and the costs that are overestimated mainly refer to health and well being of individuals. It is important to distinguish between these private costs and benefits and the external costs and benefits such as the costs of healthcare incurred by the NHS and the productivity gains from healthier workforce accruing to the firms, which the individual may be aware of but does not take into account (see Section 7.2).

These market failures result in inefficient consumption and thus inefficient allocation of resources to production of food. To correct these, the consumers must recognise the true costs and benefits of their choices. Alternatively, food prices can be altered appropriately in order to steer the consumption levels towards the optimal levels.

In the case of food products, information can be imperfect with regards to a) the availability of information about the product itself - such as nutritional content and ingredients, and b) how specific product characteristics affect the well-being of the consumer. Product labelling can assist the provision of information about product attributes and qualities. However in addition to this the consumers must be able to analyse the information about the product and correctly translate it into private costs and benefits. For example, it is of little use telling the consumer about the salt content of food if the consumer is unaware of the negative impacts on health that salt can have. Whilst ensuring the correct labelling of products is usually the responsibility of the private sector, governments' role could be in raising general awareness around food and drink and providing appropriate education and training around reading labels correctly.

The true costs and benefits of consumption could be taken into account by making sure that the prices of food and drink products reflect them. This involves identifying the magnitude of private costs and benefits and adjusting the prices accordingly, which can be a difficult exercise to implement. Taxes and subsidies can assist in manipulating prices but the correct levels are be hard to establish. However, any attempt to increase the prices of unhealthy products relative to healthy options would usually move the consumption levels closer to optimal.

7.2 Externalities in Food and Drink Consumption

Apart from failing to recognise own true costs and benefits, consumers often fail to take into account the costs and benefits from their consumption that are external, i.e. accrue to other parties such as taxpayers and employers.

Diet related ill health is a burden on the society. When consuming food or drink that have negative impact on health, the consumer does not take account is the external cost associated with such health impact. When health care is provided free of charge by the state, which is the case in the UK, the costs of treatment are not taken into account by the consumer. In addition to healthcare costs, there are other costs, for example those incurred by the employers in terms of productivity losses. These external costs are ignored in the consumption decision. In a similar way, external benefits, such as improved productivity associated with consumption of nutritious and healthy food and decreased demands on healthcare, are not considered.

Given that these external costs and benefits are unaccounted for, it is unlikely that the market will produce an economically efficient outcome and under-consumption of healthy and over-consumption of unhealthy food and drink would occur.

Externalities can be corrected in the food markets by taxing products the consumption of which is linked to certain illnesses and subsiding those that are claimed to be good for health. A study by the University of Reading 42 looked into the impact of a tax scheme focused on sources of saturated fat, the revenues of which would subsidise the consumption of fruit and vegetables. The study found that such scheme would be effective in reducing the consumption of fatty foods in favour of fruit and vegetables. However, the scheme was found to be limited in that the changes observed would remain low.

7.3 Food prices and the environment

Waste is one cause of environmental damage that can be associated with cheap food prices. It was estimated that UK households throw away 6.7 million tonnes of food, which accounts for one third of the 21.7 million tonnes purchased. Scottish households account for just under 0.6 million tonnes of the total 43. In Scotland, 61% of the food waste could be avoided, which amounts to 357 thousand tonnes. Avoidable waste is food that could have been consumed, whilst unavoidable waste includes peelings, bones and cores. UK consumers also waste 5.1 million tonnes of packaging and supermarkets were estimated to throw away 1.6 million tonnes of food 44.

Although some food waste may be recycled, 78% of it still goes to landfill - nearly ten million tonnes each year from households and trade. 45 The costs associated with food waste include the cost of energy used to transport this waste along with the CO2 emitted by vehicles, the initial cost of the food and packaging and the GHG emitted from waste management. These costs are not accounted for by food prices, thus resulting in over-consumption (or rather over-purchasing) of food.

Large amounts of food waste imply that Scottish just as the rest of the UK households buy too much food or practice poor food management. Whilst the latter could be tackled by better labelling and information provision with regards to shelf life of food as well as storage instructions, excessive purchases of food may signify that up until recently the prices may have been too low. If in the very recent past households could afford to buy enough food to let two-thirds of it go to waste, rising food prices should not in theory affect the well-being of an average household. However, as discussed in Section 6.1, the total volume of food purchased does not seem to have been affected by higher prices (see Figure 11) and instead, we have observed trading down of food as consumers switch to own brand and economy labels, which is unlikely to have any effect of food waste. This may possibly imply that food prices are still not at the optimal level which would account for the environmental damage.

Externalities are also associated with food production and the price mechanism itself does not take the external costs associated with production into account. Whilst recent increases in food prices have not been due to the external costs being incorporated into the price of food, the increases may still have a positive effect in terms of reducing consumption of food and better food management. If this takes place, the food waste problem could be improved and the costs associated with it reduced.

The costs that could be cut if food and drink consumption falls are not limited to food waste. Both production and consumption based figures state that approximately 19% of UK greenhouse gas ( GHG) emissions are related to food, with 8% of it attributed to agriculture. 46

Globalisation of the food industry means that now the food consumed in the UK is sourced from a wider range of countries located further away geographically. The external impacts associated with this include, CO2 emissions, air pollution, congestion, accidents and noise pollution. However, the food miles is not the absolute indicator of external damage, the mode of transport, methods of production and the resource use all play an important part and food miles should not be used as a sole argument in favour of local production as opposed to imported produce.

It is also important to remember that the cost of food transportation is not limited to food imported from overseas and road transport is a significant part of it. Food transport accounts for 25% of all HGV vehicle kilometres in the UK and produced 19 million tonnes of CO2 in 2002, which is 1.8% of the total annual UK CO2 emissions and 8.7% of the total emissions of the UK road transport sector 47. It is estimated that urban food tonne kilometres have increased by 27% since 1992, largely due to an increase in shopping for food by car. The direct environmental, social and economic costs of food transport are greater than £9 billion each year 48, the large part of this relates to congestion. These direct costs include accidents, GHG emissions, air and noise pollution, infrastructure costs, and the costs related to congestion. However, if the consumption of food is reduced overall through higher prices, the costs of food transport could be lowered.

The recent depreciation of pound sterling means that imports of goods into the UK are becoming more expensive - part of the reason why food prices have stayed high despite the recovery of commodity markets. If this trend continues, there could be increased incentives to expand production of food at home, as consuming imported food, especially from the Eurozone countries becomes increasingly expensive.

Global trends in prices can also affect the prices of imported and home-grown food differently. Disparities in prices would depend on what factors outlined in Section 4 had the most significant influence on food price increases and how the home food producing sector can adjust to changes compared to the global markets. If food produced in Scotland and the rest of the UK becomes relatively cheaper than its imported equivalents, not only the home economy would benefit but there could also be an environmental impact, if local food is more environmentally friendly than imported food or vice versa.

Undoubtedly increased prices would add pressure to the food security status in the short term undermining the affordability aspect of it. However, it is important to consider long term implications as well as the immediate effect and if in the long term higher prices have the effect of improving sustainability, this would have a positive effect on food security.