In the lastfew years, obesity has become a problem in many countries. Therefore, Ireland wantsto introduce a “sugar tax”, which would lead to an increase of 10 cents in everycan of soft drinks, to discourage the consumption of soft-drinks. Low-incomehouseholds would suffer the most from this tax, even a slight increase in theprice of sugary drinks will exhaust their budget. Soft drinkcans are normal goods, as income rises the quantity demanded will also rise,and the demand curve will shift to the right.
Furthermore,the demand for soft drink cans, which is the quantity of a good or service thatconsumers are willing and able to buy at each and every price in a given timeperiod, is relatively price inelastic, so the value of PED is less than one andgreater than zero A change in the price will lead to a proportionately smallerchange in the quantity demanded, because there are no close substitutes forsugary drinks, and consumers wouldn’t necessarily switch from drinking softdrinks to drinking water just because of the tax. The formula for the priceelasticity of demand (PED) is the following:PED= The sugar taxis an indirect tax, as it is imposed upon the selling price of a product, itraises the firm’s costs and shifts the supply curve of this product verticallyupwards by the amount of the tax. This type of tax is considered a specifictax, because it is a fixed amount of tax imposed upon a product. The diagramabove shows that the demand of soft drink cans is price inelastic. In thebeginning the market is in equilibrium, with Q* being supplied and demanded atthe price P*. After the tax of 10 cents per unit is imposed, the supply curvewill shift vertically upwards from S to S + tax.
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The producers of the productwant to raise the price to P2 to pass the whole cost of the tax onto the consumers. However, at this price there would be a situation of excess supply,so the price has to fall until a new equilibrium is reached at P1Q1.In this case, the producers can pass on much of the burden to the consumers,because as the demand for the product is inelastic, few consumers would stopbuying the product.
The debate about imposinga tax on sugary drinks also involves the existence of negative externality ofconsumption. A negative externality occurs when the production or theconsumption of a good has a harmful effect upon a third party. The overconsumptionof sugary beverages can cause health problems, which result in higher externalcosts being imposed on the country’s health service. Becauseof the free market, consumers will maximise their private benefit and consumeat a level where MSC=MPB.
The marginal social costs (MSC) are the private costsplus the external costs to third parties from producing one additional unit,and the marginal private benefits (MPB) are the extra benefits to consumersfrom consuming one additional unit. The consumers will ignore this negativeexternality, and they will over-consume sugary drinks by consuming Q1at the price P1. By imposing the sugar tax, the MSC curve wouldshift upwards to MSC + tax. Also, since MSC is greater than MSB (the privatebenefits to consumers plus the external benefits to third parties from consumingone additional unit), there is a welfare loss to: Theeffectiveness of the policy cannot really be evaluated yet, but a similarpolicy has been introduced in Mexico in 2014, which turned out to be a verysuccessful measure to raise revenues.
The sugar tax of 10 cents caused theconsumption of soft drinks to fall, but sales began to rise again later. A rise of 10cents might not stop a certain group in society to consume these drinks, andthey would not necessarily be more educated about their diet. Long-termproblems such as obesity are difficult to solve, but there are also a fewalternatives to discourage sugar consumption. Food and drinks that are high insugar should be negatively advertised, because especially children are likelyto be influenced by advertisements and marketing in general. Healthier options,on the other hand, should be promoted, so people will be more educated about ahealthy lifestyle. Lastly, sugary drinks and other unhealthy products should belabelled clearly, and the amount of sugar they contain should be clearlyvisible in the front of the package.