Quality standards versus nutritional taxes: health and welfare impacts with strategic firms

Abstract

Up to now, most nutritional policies have been set up to inform consumers about the health benefits induced by more balanced diets. Reviews of the impacts of these policies show that the effects are often modest. This has led governments to implement, in more recent times, policies focused on the market environment, especially on the characteristics of the food supply. The goal of this paper is to deepen the analysis of firms' strategic reactions to nutritional policies targeting food quality improvements and to derive a set of optimal policies. To reach this goal, we propose a theoretical model of product differentiation taking into account both the taste and health characteristics of products, and use it to assess the health and welfare impacts of taxation and MQS-based policies. The model study how a duopoly of mono-product firms reacts to three alternative policies: a MQS policy, linear taxation of the two goods on the market and finally taxation of the low quality good. We find that only the MQS policy and the linear excise Tax on the low quality product are welfare increasing. But the choice between the two depends on the priorities of the regulator. On the one hand, for a given level of improvement in health, we show that social welfare increases more with the tax policy than the MQS policy. On the other hand, the policies have distributional effects which must be taken into account, in particular for reasons related to their social acceptability.