Do tax and subsidy on unhealthy food induce consumer consumption for healthy food? Evidence from experiment in Surabaya, Indonesia

BACKGROUND: This study investigates the impact of price changes on decision to buy particular foods among adults in Surabaya, East Java, Indonesia. Tax and subsidy were introduced for influencing decision buy particular foods, especially unhealthy foods that are predicted have consequences on health outcome. Unhealthy foods such as fast foods or junk foods, sugar sweetened beverages (SSB), salty, and fatty foods are reported as one of main causes of obesity incidence in most countries, such as Indonesia. DESIGN AND METHOD: Computer laboratory experimental is designed for investigating the impacts of difference rates of taxes and subsidy on decision to buy foods. Taxes and subsidies rate are designed from low (5%), moderate (15%), and high rates (25%). RESULTS: The findings are as follows. Firstly, participants do not respond immediately to price changes, that is, higher prices due to taxes and lower prices due to subsidies. Economic theory suggests that consumers demand for basic need such as foods is sensitive with change in price, they respond inversely to the price changes. However, the finding in this experimental study do not support this theory prediction. Secondly, 15% and subsidies are the threshold and the larger taxes and rate for changing consumer’s choices on targeted foods. CONCLUSION: This study concludes that low rates of taxes and subsidies for unhealthy and healthy foods make these targeted foods affordable for majority of consumers. Besides introducing higher rates of taxes and subsidies, promoting and encouraging healthy life style such as consuming fresh and healthy foods is another alternative policy option.