The U.K. announced its new indirect tax on sugary drinks. An
indirect tax is a tax paid to the government on a product, the burden of the
tax is usually passed on to the consumer and they are usually placed on demerit
goods. Sugar is a demerit good, meaning it’s a product that harms society, and
it’s overconsumed. The market for sugar is an example of market failure. Market
failure is when allocation of resources is not efficient and creates negative
externalities, which  are costs that third parties bear as a result of an
economic action. In this case, costs of obesity-related diseases to healthcare
services is a negative externality.


 In this case, the marginal
private benefit (MPB) is larger than marginal social benefit (MSB), which
thereby creates negative externalities. Marginal private benefit is the
benefits enjoyed by an individual consumer of a particular good. Marginal
social benefit the total benefit of a product to society. This case is an
example of market failure because the marginal social cost (MSC), which is the
cost to society of producing a product, doesn’t equal MSB, if it did then it
would be considered social efficiency. Sugar is overconsumed, the amount
overconsumed can be calculated as: Q1 – Q*.

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                        Welfare loss is the failure of the
government to intervene in a market with negative externalities. The U.K. is
attempting to decrease the welfare loss by imposing this tax which would cause
the MSC to shift up, eliminating the welfare loss. If the difference between
MSC and MPC equals the difference between MSB and MPB then the negative
externalities would be eliminated.

                        There are effects to placing an
indirect tax. Some of which include higher prices for consumers, decreases in
producer revenue, and higher government revenue. The price elasticity of demand
(PED) for sugar is low it means that demand is inelastic, meaning the demand is
unresponsive to changes in price because it tastes good and can be addictive,
the producers will try and pass off the majority of the tax burden on consumers
because this good is a demerit good. Due to this, the price would increase from
Pe to P1 as shown on the graph below. The Law of Demand states that as the
price of a good increases, the demand will decrease and vice versa. Since the
tax would cause the price to increase, the demand would decrease. Producer
revenue would fall from 0PeEQe to 0CYQ1. Government revenue
would then be CP1XY.


                        There multiple and disadvantages to
imposing a tax. The article omits a significant disadvantage: indirect taxes
are essentially regressive taxes. A regressive tax is when rich people pay less
and poor people pay more. This type of tax could make poorer communities poorer
while having little to no effect on richer communities. Since sugar is
inelastic, the tax will most likely have little effect on the short-term
consumption of sugar. A tax also decreases producer revenue, which could lead
to more employees being let go and higher unemployment. While there’s several
disadvantages, there are advantages such as higher government revenue which
funds the production of merit goods. Merit goods are goods that would be
undersupplied by the free market so the government usually provides them, like
education. Another advantage is that the long-run consumption of sugar would
most likely decrease because the revenue from the tax could be funneled back
into advertising against drinking sodas targeted at younger generations.

UK’s tax has been the subject of a fruitful debate. Critics say
that there is no long-term reduction in the sale of sugary drinks. Meanwhile,
Cancer Research UK found that a 20% tax on sugary drinks will prevent 3.7
million people from becoming obese in the next decade. Surprisingly, the public
supports the tax. They look to the tax and advertising bans on cigarettes and
saw that it was successful.

                        In conclusion, a tax on sugary drinks
would reduce obesity to a certain extent. In the short-term, the tax wouldn’t
be effective due to sugar’s low PED, however in the long-term there would be a
significant reduction in sales, meaning PED will rise and the quantity will
fall. The tax is worth imposing because the benefits outweigh the costs, it
gets rid of the welfare loss, and benefits society. If the government could
strike a balance between protecting jobs and reducing sugary drink sales then
the indirect tax would be a slam dunk. 

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