On my favorite podcast, EconTalk, Russ Roberts recently had an engaging discussion with Robert Frank about Ronald Coase's writings on externalities. Having recently published a paper about externalities in food production, I couldn't help but apply some of their discussion to the topic of obesity.
The usual claim is that obesity creates an externality because of public health care costs (e.g., Medicare, Medicaid). My health problem imposes costs on you because your taxes pay for my health problems. There are good reasons for arguing that this sort of externality is not the type that gets economists up in arms: these are simply zero-sum transfers from the healthy to the sick that don't shrink the size of the pie. When I try to explain that to people, I normally hear crickets chirp and see eyes glaze over. That this is not an efficiency-reducing externality is true. But, it is apparently utterly unconvincing.
Back to Econtalk. Roberts and Frank discussed Coase's observation that externalities cause reciprocal harm, and many times it is tough to really know who is the offender. If I play drums loud at night do I cause an externality on my neighbor? Or did my neighbor create the externality by choosing to live next to me? Coase's answer to this conundrum, it seems, was: "who cares"?
It doesn't matter who is to blame. The key question is: what is the lowest cost way to alleviate the externality? It could be making my neighbor move. It could be outlawing my drum set. It could be requiring that my neighbor construct a sound-proof barrier. Or, if we could negotiate, it might be me making side payments to my neighbor to let me play (or him paying me not to play). By avoiding the offender/offendee mindset, a wide range of possible solutions emerge, many of which are likely lower cost than solutions that might initially come to mind.
In discussions of obesity-related externalities, the implicit assumption is that the obese are the offender causing harm to the taxpayer (or more cynically, that food companies are causing harm to people who become obese, who in turn cause harm to taxpayers). Coase's insights, however, suggest that taxpayers are also responsible for harm because they've put themselves in the way of the obese. The externality wouldn't be there to begin with if taxpayers weren't picking up the tab.
One really low cost way of resolving this externality is to have taxpayers refrain from picking up the tab for the obese (or at least make the obese pay some significant share of their cost). Many people would find that solution reprehensible: how dare we get rid of Medicare/Medicaid? Fair enough, but most private insurance plans impose at least some cost via the use of deductibles to avoid the problems of moral hazard (i.e., people behaving in a riskier way because they know they're insured), and yet by fully insulating people from costs, it seems we've moved in exactly the opposite direction with our public health care. What about "progressive" public health care deductibles that vary with income?
Coase is perhaps best known for his argument that negotiation can resolve the externality dilemma. This holds if transactions costs are low. Frank argued in the podcast that when transactions costs are high, and it is unlikely the affected parties can negotiate, the best public policy solution is to try imagine what would happen if people were able to negotiate. What would this negotiation look like for obesity externalities?
One party, "the government" might say: "Tell you what, I'll pay your health care costs if you'll just eat the way I tell you, and if you don't, I'll increase the price of many of the foods you like to eat until you eat the way I want you to." Some people might take that deal. Others, I suspect, would respond: "just leave me alone."
Another conversation. "The obese" might say: "Tell you what, I'll promise to eat the way you want me to and I won't complain about public policies affecting my tab at the grocery store if you'll just pay my health care costs." Some tax payers might say "ok." Other taxpayers, I suspect, would respond: "just leave me alone."