The economics of obesity

Edward Meehan


March 31st, 2020

Edward Meehan takes a closer look into the increasingly pertinent disease that’s replacing heart disease as Australia’s leading cause of death

Obesity is a growing health challenge on a global scale. With 2 in 3 adults in Australia obese or overweight [i], many experts believe it is replacing smoking as the leading cause of preventable deaths nationwide ii. As a risk factor for diabetes, heart disease, strokes and certain cancers, statistics from 2015 suggest that obesity was responsible for 8.4% of the burden of disease in this country [i]. Obesity is also expensive – estimates range from an annual cost of $8.6 billion to a shocking $56.6 billion  [ii]. More importantly however, obese individuals on average have shorter life expectancies and spend more of their lives experiencing disease and disability [iii]. In Economics terms, this is referred to as a decrease in Quality Adjusted Life Years (QALYs). If economics is about finding how best to allocate scarce resources to meet people’s wants and needs, then an economical approach to the obesity crisis must begin with an appreciation of its diverse causes. This article examines obesity from an economic perspective and what it can tell us about the origins and possible solutions to this national crisis.

Obesity is often perceived as a consequence of poor diets and lack of exercise. While these are the direct causal factors of obesity, taking a step back it is clear that there are many larger influences at play, referred to in public health as “social determinants of health” iii.  These are the conditions in which people spend their lives and which play a great role in shaping their health status.  One social determinant which has been extensively studied in relation to obesity is that of the built or physical environments that people live in [iv]. The term “obesogenic environments” refer to environments with features that make them conducive to obesity. For example, the layout of cities often discourages walking or involves extensive travelling time to workplaces. In addition, areas with a high density of fast food outlets may be associated with poorer diets and thus obesity. Employment and working conditions can also play a role. Long working hours can leave less time for exercise and healthy food preparation and the sedentary nature of many modern jobs may further compound the problem [iv]. Furthermore, the sedentary nature of many modern jobs is a risk factor for obesity [v]. Social norms relating to diet also play a part.

An influential paper published in 1975 made an analogy between the practicing medicine and rescuing a string of drowning people from a fast-flowing river. The enormous efforts to pull those drowning from the water leave the rescuer with “no time to see who the hell is upstream pushing them all in” [vi]. Treatment of obesity once it has arisen can be seen in a similar way. While it is worthwhile and helps those it is treating, efforts to address the factors further upstream may be more effective in the long term. The research of health economists seems to bear out the lessons of McKinlay’s analogy. Economists evaluate treatments by looking at the money spent to maintain the aforementioned Quality Adjusted Life Years (QALY). In this way, a study found that treating obesity with the drug Orlistat costs $8,327 per QALY saved and treating it with gastric bypass surgery costs between $10,000 and $35,600 per QALY saved in men. Conversely, the same study found that a prevention program targeting primary schools – known as the Coordinated Approach to Child Health (CATCH)- cost only $900 per QALY saved [vii].  By shifting the focus of action to the upstream causes of obesity, governments can see better returns in health outcomes for their investment.

From an economics perspective, the increasing rates of obesity can be seen as a form of market failure iii. Market failures occur when markets do not operate efficiently to maximise social utility. In relation to obesity, market failure can occur because the costs to society caused by consumption of unhealthy products are not reflected in their price, leading to overconsumption and poorer health outcomes iii. In the same vein, the benefits to society from the purchase of healthy products like fruit and vegetables, are also not reflected in their price, leading to underconsumption [iii]. Market failure can also occur when consumers do not have adequate information about the goods and services they are buying iii. For example, consumers unaware of the risks posed by sugary drinks are likely to purchase more than they otherwise would. Behavioural economics can also give insight into the issue. Whilst economics traditionally assumes consumers will make rational choices when buying goods and services, research has shown that patterns of consumption can become habits that are very hard to break [iii]. Rather than rationally weighing up the costs and benefits of unhealthy food and beverages, consumers engaged in habitual consumption can form ‘tunnel vision’ and need very strong disincentives to break their habit.

Economists offer several typical ways to intervene in a market failure which can be applied to the obesity crisis. Corrective action to address poor knowledge of nutrition can take the form of education campaigns conducted in the media, in schools and in workplaces. It can also take the form of compulsory food labelling laws. The OECD notes that a response to the negative externalities generated by unhealthy food could be the introduction of taxes on foods high in saturated fat or sugar iii. Such taxes are controversial, however. One criticism is that given their flat structure, they would impose a greater financial burden on the less well off. On the other hand, the OECD also found that it is the less well-off who would experience “consistently larger health gains”, because they would be more likely to respond to the disincentives created by taxes [iii]. The other side of the coin, subsidising fruits and vegetables and other healthy products, sidesteps these criticisms. The OECD concluded that taxes, subsidies and health education campaigns can all be effective and that used in combination, they may have a synergistic effect greater than any would if used in isolation [iii].

The obesity crisis is best understood in the context of its many underlying social and economic dimensions rather than a narrow focus on the individual factors involved. Economics can provide much insight when it comes to the causes and remedies of this pressing health issue. 

[i] Overweight & obesity Overview – Australian Institute of Health and Welfare [Internet]. Australian Institute of Health and Welfare. 2020 [cited 25 March 2020]. Available from:

[ii] Obesity – 2016 [Internet]. Australian Medical Association. [cited 25 March 2020]. Available from:

[iii] Organisation for Economic Co-operation and Development. Obesity and the Economics of Prevention FIT NOT FAT. Organisation for Economic Co-operation and Development; 2010

[iv] Australian Institute of Health and Welfare. Australia’s health 2018. Canberra: Australian Institute of Health and Welfare; 2018 p. Chapter 4.10, p. 8, 9.

[v] Thorp A, Owen N, Neuhaus M, Dunstan D. Sedentary Behaviors and Subsequent Health Outcomes in Adults. American Journal of Preventive Medicine. 2011;41(2):207-215.

[vi] Mckinlay J. A Case For Refocusing Upstream: The Political Economy Of Illness. Applying Behavioral Science to Cardiovascular Risk. 1975;.

[vii] Cawley J. The Economics Of Childhood Obesity. Health Affairs. 2010;29(3):367.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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