One claim regarding the so-called obesity epidemic is that there is a market failure whenever a national health scheme must pick up the health damages caused by being overweight. Then obese people impose above-average health costs that are borne by those of normal weight. One solution - not very practical - would be to levy an extra premium on those who are overweight. In the absence of such a measure, the solution is to devise active public policies - taxes and bans on harmful foods that address the obesity issue.
Private sector actions however also impact on obesity because private firms see the prevalence of obesity as a market opportunity. The spead of gyms, health clubs and diet groups such as Weight-Watchers and Jenny Craig, is testimony to the desire of people to have an attractive body shape. Economics suggests that, if health costs are subsidised, people will underinvest in such weight-control activities. If the first-best solution of manipulating national health system charges is ruled out, a second-best solution is to subsidise private sector weight-reduction activities from the public purse. This is unattractive if people attend gyms for aesthetic rather than health-related reasons since while it might boost egos it might not lead to reduced public sector health costs.
But if a pharmaceutical that addressed obesity could be developed (according to today's Age it might) then a workable second-best solution to the obesity issue would be to subsidise the provision of such drugs via the Pharmaceutical Benefits Scheme to obese individuals. Moreover the subsidy might not need to be large - people would have high incentives to improve their body shape without incurring the costs of dieting and time-intensive exercise programs. Its an interesting speculative thought.