Home > Externalities > Economics of the Sugar Tax

Economics of the Sugar Tax

Celebrity chef Jamie Oliver was delighted with the ‘sugar tax’ that was announced as part of the 2016 Budget in the UK. The tax, which will come in from 2018, could add 8p (17c) to the price of cans of fizzy drinks like Coca-Cola, 7Up and Irn Bru, energy drinks like Red Bull and carton juice drinks like Ribena from 2018. Below is a clip from BBC Newsnight explaining the rationale behind the tax.

 

In economics sugary drinks have a negative externality, (cost to third party) and the tax will make consumers pay some of the external cost.

This higher tax reduces the quantity demanded, raises revenue for government and achieve a more socially efficient level of consumption. The money raised will go towards sport in primary schools. The sugar tax should help to reduce major health issues, such as:

  • obesity and related illnesses
  • diabetes –  in particular type 2 diabetes
  • tooth decay

These external costs are reflected in higher costs imposed on the UK National Health Service (NHS). Poor health also adversely affects work and productivity. Therefore, the social cost of sugar consumption is greater than the private cost of sugar. Remember:

Social Cost = Private Cost + External Cost

This diagram shows the impact of a good with external costs. The free market Quantity is Q1, Price P1. But, the socially efficient level of output is at Q2 (where MPB marginal private  benefit (assuming no externalities of consumption)  = MSC marginal social cost) The solution is to impose a tax which raises the price and reduce the quantity to Q2. Source: Tutor2u

Neg Ext Prod

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  1. March 20, 2016 at 10:36 am

    Could it not be argued that sugary drinks are a demerit good as well in that they cause health problems to the consumer of the good itself and the external costs are derived from those health problems?

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