The Sugar Tax and Its Effects On The UK Economy

Driven by overconsumption of sweetened beverages, rates of obesity and dental problems are rising among the children in the UK. Obesity and dental issues lead to increased healthcare expenses, creating a negative consumption externality, defined as “a negative benefit that arises from the consumption of a good or service not only for the consumer, the children, consuming sweetened beverages but also for the entire population, who’re carrying the burden of the healthcare services equally. ”Such a burden is called an externality, which is defined as “a cost or benefit that is caused by two parties but incurred by a third”. Externalities cause market failure, defined as ‘’an outcome in free markets where the market is unable to produce at the point where social surplus is maximized. ’’ In response to the problem of market failure created by sugar consumption, the UK government introduced a sugar tax, which aims to eliminate the externality associated with excessive sugar consumption. This blog entry will analyse the impact of this tax on the sugar market within the externalities subject.

Under the free market conditions, the children take into account only their marginal private benefit (MPB), which’s the satisfaction they get from consuming a sweetened beverage and sweetened beverage producers supply according their marginal private cost (MPC), which include the typical costs of producing one unit of sweetened beverage in a factory, leading tothe market equilibrium at Ep, which results in the consumption of Q1 at P1. However, the social benefit of consuming sweetened beverages, indicated by the point, where marginal social benefit (MSB) curve cuts the supply curve, leading to Qso at Pso, which is a much lower quantity than Q1, because sweetened beverages have negative benefits that spill over to non-consumers through increased queuing and expenditure of the healthcare industry. Private consumers only take into account their private benefit, demanding sweetened beverages at a quantity greater than the societal optimum. Hence, the market equilibrium at 𝐸 indicates an overallocation of resources towards consumption, creating DWL. Private 𝑝 consumers not internalising their external cost puts a burden of treating obesity, dental issues, and other related illnesses on healthcare industry. This DWL also indicates that the costs to society outweigh the individual benefits gained from consuming the additional units of sweetened beverages, demonstrating a clear need for intervention.

To eliminate the externality associated with consuming Sweetened beverages and align the product's true societal harm with the price private consumers pay, the government implemented a sugar tax. This tax increases production costs, shifting the supply curve from S to S+tax . The leftward shift in supply causes the equilibrium to shift from 𝐸 to 𝐸𝑝 𝑠𝑜 and raises the price of sweetened beverages from 𝑃1 to 𝑃, reducing quantity demanded from Q1 to Qso as consumers are less willing and able to buy sweetened beverages. The tax is equal to the negative benefit, so the quantity demanded and supplied will shift to the societally optimum 𝑄𝑠𝑜 indicating the theoretical eradication of DWL due to quantity demanded matching the optimum, showing that the over-provision of sweetened beverages was curbed with a price increase. The sugar tax intervention by the UK government is aimed at correcting a market failure caused by the negative consumption externality of sweetened beverages. By imposing this tax, the government intervenes to internalise the externality associated with sweetened beverage consumption making the market price more accurately reflect these true societal costs. This intervention has differing effects on stakeholders on both the long and short run. The government is better off, as its tax revenue increases due to the implementation of the indirect tax, represented by area F on graph 2. The tax revenue generated from this intervention can be reinvested into solving the root cause of the externality: obesity and other health problems created with the consumption of sweetened beverages such as nudging the consumer to prefer more healthy alternatives through education and advertisement. Producers are worse off since they sell a lower quantity Qso at price Pso-Tax. In the long term, however, the loss of revenue for producers pushed them to reduce sugar content by 21.6%, curbing the main root of the externality, overconsumption of sugar, helping the reduction of external cost. Consumers are worse off since they are willing and able to buy a lower quantity of sweetened beverages, Qso at price Pso. However, the tax makes society better off since the externality is eliminated and allocative efficiency is achieved, eliminating DWL. Despite the assumption of the law of demand that price and quantity demanded are negatively correlated, ceteris paribus, since sugar demand is relatively inelastic, many consumers, especially those addicted to sugary drinks, continue to purchase sweetened beverages despite higher prices. The consumers will assume a greater burden of the tax because their demand is relatively insensitive to price, regressively affecting the poorer demographic, increasing income inequality.