Potential dietary outcomes of changing relative prices of healthy and less healthy foods: The case of ready-to-eat breakfast cereals

Many prevalent and costly health disorders in the U.S. can be attributed in part to poor diets, overconsumption of calories, and physical inactivity. Taxing less healthy foods and subsidizing healthy foods as a strategy to improve diet and health has attracted growing interest among policy makers and researchers. We test this strategy by using national household purchase data to estimate a censored, price and expenditure endogenous demand system for 12 food groups that are commonly consumed at breakfast: low- and high-nutrition ready-to-eat breakfast cereals, eggs, breads, hot cereals, breakfast bars, juice, whole and reduced-fat milk, yogurt, meats, and coffee. The estimated demand elasticities are applied to nationally representative food intake data to simulate—under the assumption of perfectly price elastic supply—the potential dietary improvement from taxing low-nutrition and subsidizing high-nutrition ready-to-eat breakfast cereals. We find that the demand for both types of cereals is own-price inelastic, suggesting that consumers are not likely to make large shifts in consumption of cereals if the price changes. Thus only limited dietary improvement can be expected from taxes and subsidies. Furthermore, when the healthfulness of breakfast foods is evaluated using a comprehensive list of nutrients and food components, a price intervention strategy may result in unintended, adverse impacts. Our simulation results suggest that the hypothetical price intervention actually increases the calorie content of foods consumed at breakfast.