This dissertation examines the increased prevalence of obesity in the context of market failure. In welfare economics, market failure is an important precondition for government intervention. Obesity in the United States has risen dramatically in the last several decades; over two thirds of American adults are overweight, and one third is obese. Obesity is a risk factor for a wide range of health conditions, including heart disease, diabetes, cancer, stroke, and osteoarthritis. In addition to the significant human costs, there are economic ramifications to the sequelae of obesity, such as increased costs associated with healthcare, disability and absenteeism. Economists have speculated about the impact of increased mortality rates on the lifetime costs of obesity; some have proposed that earlier mortality may offset increased obesity-related costs.

This dissertation develops a model of the lifetime, external costs of obesity in the United States in two phases. Phase One is a meta-analysis of the obesity-related costing literature, which informs cost categories and estimates in the subsequent phase. Phase Two is the development of a Markov model using simulation software, which calculates the lifetime, external costs of a hypothetical, 1000-person, obese cohort in comparison to one of normal weight.

Results from the model developed here suggest that lifetime, external costs of obese adults are on average $54,579 ($2007) greater per person than those of normal weight. Using this estimate, which is likely conservative, if all 9 million obese children in the United States become obese adults, it would represent a lifetime, external cost of almost $500 billion.

The findings of the analysis presented here suggest that there are substantial financial externalities associated with obesity. Other obesity-related market failures may include information failure and imperfect rationality. Results from the present study suggest that government intervention to reduce obesity rates is warranted.