Abstract

This paper examines the potential impact of policies to promote dietary health in the context of a tax-financed universal health care (TFUHC) system, as found in Canada and many other countries, in which a universal level of treatment is set by government policy. I construct a model in which a low quality diet raises the risk of disease, and disease in turn causes a loss of labor productivity. Low quality diets are less expensive than high quality diets, so dietary choices are worse for lower income households. The effect of disease can be partly offset by medical treatment. I show that dietary choices under TFUHC are distorted by a moral hazard problem which leads to diets that are lower in quality than is first-best. I then examine three different policy interventions to address the dietary distortion: a reduced level of treatment; risk-based premiums for health care; and a quality-based tax on food. I calibrate the model with Canadian data on type 2 diabetes and derive the net benefit and distributional impact for each policy.