Cap and Trade and Soda

A few days ago, my family and I went on vacation. On the way back, my family and I were discussing various things including some matters of politics. One thing that came up was some of New York City mayor Michael Bloomberg's recent actions. I expressed the view that the ban on soft drinks larger than 16 ounces seemed rather heavy-handed. (After reading a little more about the exceptions for fruit drinks along with sales at grocery stores, I'm a little more happy to see that, but I still feel the ban was heavy-handed.) I then heard the argument that even if it is heavy-handed, it does help combat the obesity crisis by reducing access to drinking 16 ounces of soda at a time, because even if it is still technically possible for someone to fill up an 8-ounce cup twice, human psychology is such that said person would only fill up once, because for many people the convenience of filling up once trumps the desire to have as much as possible. I then wondered what other alternatives could be considered. The simplest alternative would seem to be a tax akin to taxes on cigarettes; if the large sodas are taxed heavily at such venues, people would naturally be discouraged from drinking as much. I have taken the class 14.03 — Microeconomic Theory and Public Policy, though, so I have seen that in many cases a Pigovian tax scheme like that may not achieve the most efficient outcome because it is difficult to adjust tax rates to control quantities precisely. Then I also remembered learning about cap and trade schemes to control quantities. Would that work? Let's take a look after the jump.

The reason why any cap and trade system would be implemented would be to steadily correct for an externality, as long as property rights can be defined for that externality. What is an externality? It is any effect of a market transaction that may affect those not involved in said transaction so that said effect is not reflected in the private market price. The most famous example of a cap and trade system is for carbon emission. Carbon emission affects far more people than just the buyers and sellers of products whose production processes involve the emission of carbon compounds. Furthermore, the rights to pollute can easily be assigned to sellers, as their production processes cause pollution. The government can then allocate pollution permits to companies and let companies trade those permits amongst themselves at an agreeable market price. After a certain point, the government can reduce the number of valid permits. In this way, the amount of pollution permissible can be decreased steadily over time rather than being banned all at once.

Would this work for soda? Defining what the externality really is already becomes problematic. It is true that if a person becomes obese because of large sodas, then that person may have to deal with economic costs including the higher costs of health care, fewer job opportunities (in many cases), and social stigma. But if the people buying these sodas are adults, then except for the case of health care, these costs are generally private costs and will not be shouldered by others; in the case of health care, well, we already have the ACA for that. Plus, sodas aren't really a factor of production per se, so swapping out sodas for alternatives would make consumers less happy in the short term, even if there is a long term societal benefit. This means soda consumption is not analogous to carbon pollution; if carbon pollution were analogous, then that means that certain buyers and sellers can actually consume pollution and directly benefit from it (and as far as I have read, it isn't really possible to get high off of carbon dioxide).

There is another potential solution though. What if it were possible to identify the exact obesogenic compound(s) in soda? If that were to be true, then the externality would be the inducement of obesity by those compounds in soda. That would mean that soda companies could get permits to add limited amounts of said compounds and would eventually have to swap those out for other compounds that do not cause obesity. The problem with this is that company recipes for sodas are heavily guarded secrets, and it would be extremely difficult to regulate that in the production of soda. Thus, I can conclude that a cap and trade system would not work for soda. A tax may work better because the tax rate would be able to better align the price of a large soda with the health costs of its consumption. That said, feel free to leave a comment if there could be a way for cap and trade to replace the large soda ban and I am overlooking that approach (or leave a comment for any other reason, for that matter).