Fiscal Reform in Costa Rica: Price Elasticities of Major Food Categories to Inform Decision-Making

Area of Science:

• Agricultural Economics
• Public Health Policy
• Consumer Demand Analysis

Background:

• Costa Rica is revising its fiscal policies, including value-added tax (VAT).
• A new "canasta básica tributaria" (CBT) is being defined, incorporating nutritional criteria.
• Understanding food demand elasticity is crucial for effective fiscal policy and nutritional outcomes.

Purpose of the Study:

• To analyze price elasticities of major food categories in Costa Rica.
• To inform the definition of a nutritionally-informed basic tax basket (CBT).
• To guide fiscal policies aimed at promoting healthier food consumption.

Main Methods:

• Utilized data from the 2018 National Survey of Household Income and Expenditures.
• Applied the Quadratic Almost Ideal Demand System (QUAIDS) model to estimate price elasticities.
• Analyzed substitution and complementary effects between food groups.

Main Results:

• "Bread and cereals," soft drinks, and "Milk, cheese and eggs" exhibit the most elastic demand.
• "Fruits" and "Oils and fats" show substitution effects, as do "Fruits" and "Bread and cereals."
• "Milk, cheese and eggs" and "Oils and fats" are complementary to "Bread and cereals."

Conclusions:

• Price elasticity analysis provides insights into consumer responses to fiscal policy.
• Substitution and complementarity patterns are key for designing a nutritionally effective CBT.
• Fiscal strategies should promote healthy foods and discourage unhealthy ones within the CBT framework.