Uploaded by Miyu Bansal

Commentary on Sugar Tax

Sugary drinks are demerit goods that are over-provided and over-consumed in the free market. Sugary
drinks have a number of negative consumption externalities, meaning that the consumption of them
negatively affect third parties. Due to these externalities, the market for sugary drinks is failing, as it
is not working at socially optimum level.
Sugary drinks have negative consumption externalities. For example, sugary drinks correlate with
illnesses such as obesity, which in turn can decrease work productivity. Additionally, the treatment of
these illnesses will have a significant opportunity cost, as the government will be spending a portion
of their budget on them. Overconsumption of sugary drinks may also cause the consumer to
experience mood swings due to the ‘high’ that sugar gives. These mood swings may cause the
consumer to make irrational decisions, which could harm those around them.
MPC (Tax)
Measure of Externality
20% Tax
Welfare Loss
Qopt Qtax Qfree
Figure 1 – Negative consumption externality and ad-valorem tax on sugary drinks
Figure 1 shows the impact of sugary drinks’ negative consumption externalities on its market. The
benefits to society and consumers are represented by the marginal social benefit (MSB) and marginal
private benefit (MPB) lines. The costs to society and consumers are represented by the marginal
private cost (MPC) and marginal social cost (MSC) lines. Left alone the free market will work where
the MPC and MPB meet (A). At this point quantity produced is Qfree and price level is Pfree. However,
the social optimum is where MSC meets the MSB (Point B, Qopt, Popt). As the consumers consume to
maximise utility, without considering the consequences of their actions, sugary drinks are
overconsumed (Qfree > Qopt). As a result of this overconsumption, the MPB is greater (above) the MSB.
To decrease the overconsumption of sugary drinks, the Heart Foundation has suggested the
implementation of a 20% ad-valorem tax on sugary drinks, shifting MPC left to, MPCTax. Mexico
introduced a “10 percent soda tax” that cut demand for sugary drinks by “an average of 6 per cent,”
Qfree to Qtax. Taxes are not an effective means of “changing purchasing habits and achieving healthier
diets,” as sugary drinks are price inelastic – a change in price causes a less than proportionate change
in quantity demanded, possibly due to the addictive nature of sugary drinks and lack of close
substitutes. Additionally, a sugar tax would be unpopular with Australia’s food and grocery sector, as
they have written a review “discrediting” the idea of a sugar tax, stating that it “incorrectly assumes
that [sugar] alone may affect an individual's health." This may also cause the governing body to loose
popularity, or in some cases loose the next election. On the other hand, the implementation of a tax
would significantly increase government revenue, allowing the funding of health care. Government
revenue may further grow if the slight reduction in demand for sugary drinks results in less people
requiring medical treatment for diseases linked to high levels of sugar, such as diabetes and obesity.
Overall, a tax would benefit consumers, producers and society. In the short term, consumers will be
negatively affected, as they will be paying more money for less sugary drinks (shown in figure one,
Qfree at A > Qtax at D). Moreover, the producer’s revenue will decrease (moving from A to B, the
producer will receive Pprod rather than Pfree and sell Qtax rather than Qfree). In the long term, the Heart
Foundation says that a tax would be “very successful in shifting consumption away from [sugar],” in
turn reducing “rates of obesity and diabetes.” Consumers will have more savings, better health and
will be more productive. The tax will incentivise producers to reallocate resources and produce
healthier goods (e.g. juice and smoothies). This will generate jobs for those that were made redundant
when the economy shifted away from the production of sugary drinks. Additionally, the tax may
incentivise firms to invest in research that may increase productivity and cooperate revenue. Society
will benefit from the tax, as the externality created by sugary drinks will decrease – Qtax is closer to
optimum of Qopt. This will reduce welfare loss (Orange and Yellow  Orange), increasing social surplus.
Taxes are an effective way to reduce sugary drink consumption, however, by itself it will not reduce
sugary drink consumption to a socially acceptable level, Qtax > Qopt. However, alongside other ‘antisoda’ measures, like advertising campaigns and subsidies on healthy drinks, the tax will likely achieve
the socially optimum level, eliminating the negative consumption externalities associated with sugary
drinks. Overall, a sugar tax is justified.
Miyu Bansal
Word count: 745
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