Tuesday, March 25, 2014

A Cost-Benefit Analysis for Sugary Drink Regulation in New York City

Why the Big Apple? Because it where former Mayor Michael Bloomberg first tried, by executive fiat, to curb sugary drink consumption by city regulation. New York City's "Portion Cap Rule" would limit the sale of sugary drinks within the city to 16 oz or less in certain "food service establishments," most significantly full-service restaurants (including pizza parlors and cafes, as well as New York’s famously expensive restaurants), limited-service restaurants (fast food joints, mostly), and movie theaters. The Portion Cap Rule remains in legal limbo, awaiting a hearing before the New York State Court of Appeal later this year. Current Mayor Bill deBlasio has committed to carry this rule forward, notwithstanding his campaign platform of being the anti-Bloomberg.

The Portion Cap Rule was met with derision, cries of foul, and warnings of the coming Bloomberg "nanny state." Even New York State NAACP President Hazel Dukes weighed in against this affront to "freedom of choice." The naïve (like myself) might have found that surprising; New York City’s obesity problem and related type 2 diabetes problem that is in significant part attributable to the consumption of sugary beverages has hit communities of color especially hard. While the overall obesity rate in New York State is 23.6%, it is 26.3% for Hispanics and 32.5% for non-Hispanic blacks. Rates of diabetes are twice as high for Hispanics and non-Hispanic blacks as for whites. If there were populations that would have benefited from a paternalistic curb on sugary drink consumption, it would be these communities of color.

Missing from this polemicfest was any attempt to ascertain any sense of proportionality of the health benefits of sugary drink regulation, as opposed to the costs of this infringement of liberty. Given the continuing importance of the obesity problem and related health disorders, some quantitative analysis would appear to be useful. I have posted a paper on SSRN that sets out a very rough cost-benefit analysis of sugary drink regulation in New York City. Stemming from a joint research project with my students at Florida State University College of Law, we originally attempted an analysis of the Portion Cap Rule itself, but trying to ascertain the amount of behavioral change effected by the Rule proved to require too much guesswork. Instead, this paper simply estimates the costs and benefits of a total ban on sugary drinks in New York City. Such a ban is fanciful, but it helps to identify the regulatory endpoint. One might plausibly presume that the costs and benefits of any partial ban (like the Portion Cap Rule) would capture roughly the same fraction of costs and benefits of a total ban. The total costs are the total profits of sugary drink sales specific to New York City. I do not include an estimate of the consumer surplus of sugary drink consumption for two reasons, one principled and one convenient: (1) diet drinks and numerous other caloric substitutes are readily available, and (2) that would be really hard to estimate. The total benefits are in the form of the reduced health costs achieved from lower intake levels of sugary drink consumption, again specific to New York City. If a sugary drink regulation such as the Portion Cap Rule managed to curb sugary drink consumption by 50%, one might assume that the costs would be about half the total profits from sugary drink sales in New York City, and the benefits would be about half the total health costs attributable to sugary drink consumption.

The costs of a total ban on sugary drink sales in New York City would be over $500 million, and are unlikely to approach $1 billion annually. The total potential benefits range from $3.2 billion to over $13.0 billion. The benefits are the reduced health costs of treating diseases associated with excess sugary drink consumption, namely obesity, type 2 diabetes, and coronary heart disease. The benefit estimate also includes estimates of the costs of premature mortality that can be attributed to sugary drink consumption. The costs of these relatively few premature death are very large, and drive the results. Without estimates of the costs of premature mortality, the costs and the benefits appear roughly comparable.

Looking beyond the Portion Cap Rule, which seems likely to go down in defeat, the broader question is this: should sugary drink consumption be regulated, and who should do the regulating? The cost-benefit analysis strongly suggests that it is worth doing, and Bloomberg's imperial style aside, this political and legal micro-drama suggests that cities with obesity problems stand to gain significantly. Within cities, the costs (in the form of lost profits) are small, because most of the profits of sugary drink sales accrue at the manufacturer level, not the retail level (i.e., Coca-Cola company, based in Atlanta). The benefits, on the other hand (in the form of improved health outcomes) are enjoyed on the local level. Insofar as the obesity problem is attributable to excessive sugary drink consumption, the best point of attack would appear to be at the local level. Moreover, as a political matter, a citizenry is more likely to tolerate a paternalistic "nanny-state," by its local government, less likely by its state government, and Congress, well, that would be something to watch, wouldn't it?


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You consider the costs of premature mortality, but what about the benefits? People who drink lots of cola, get fat, and die of heart disease are people who don't live long enough to collect social security and fall prey to cancer, which is more expensive to treat (or perhaps I'm wrong on that). As with tobacco, deciding what to maximize is tricky.

Posted by: Eric Rasmusen | Mar 25, 2014 1:40:49 PM

Good stuff, Shi-Ling, and I love both the paper and the way you were able to draw a whole seminar into its production. In your post, though, you accept the framing of the NYC initiative as "paternalistic." But a lot of the costs you're estimating are externalities -- fiscal costs NYC taxpayers will bear as a result of the health of their fellow gothamites. That is the proverbial fiscal nose at which the right to swing one's soda-grasping elbow ends, isn't it? To turn this point closer to your post, we could ask whether CBA should be done differently when some of the costs are "internalities" rather than "externalities." For example, externalities might be discounted to present value using a social discount rate, while internalities might arguably depend on subjective discounting.

Posted by: BDG | Mar 26, 2014 9:24:45 AM

This is interesting, Eric wonders if I've left out positive externalities, and Brian thinks I've understated the negative externalities. I agree with Brian, and that is a reason to tax sugary drink consumption, not regulate it, much the way that we tax tobacco. But as for Eric, here is response:
1. I don't think you are arguing, that some have argued, that we are actually better off with people dying earlier, otherwise the value of a statistical life would be zero or negative. But you think that perhaps the $7.4 million EPA estimate for the value of a statistical life does not adequately account for the health cost savings from people dying earlier. Or, alternatively, you think that the Centers for Disease Control estimates of the direct and indirect costs of obesity, coronary heart disease, and type 2 diabetes are overstated because they do not account for the savings of people dying. Here would be a potential fix to that problem: if the CDC estimates are for the health costs of treating disease now, and if sugary drink regulation reduces the number of deaths and prolongs some lives only to have them die eventually, then a reduction in sugary drink consumption would carry with it hidden costs as well as benefits in people avoiding disease altogether. OK, fair accounting point. What I would say is that in estimating the costs and benefits of sugary drink reductions, the benefit side is dominated by the costs of premature mortality. Even a big savings in health care costs -- say a doubling -- would not nearly cut into the benefits realized by having *fewer* people die from disease brought on by sugary drink consumption.

Posted by: Shi-Ling Hsu | Mar 28, 2014 12:38:42 PM

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