Negative externalities of consumption is where the consumption of a good may have spillover costs or negative externalities for others e.g. passive smoking, drink driving, sugary drinks. If left to the free market goods that have negative externalities of consumption will be under priced (Pm) and over consumed (Qm) compared to the socially desirable price (Ps) and quantity (Qs). At Qm the MSC > MSB therefore the quantity needs to reduce until the MSC=MSB. The government could tax the good, increasing its price and lowering the level of consumption back to more socially desirable levels.
Coke and how much sugar?
The video clip below, although a bit old, is from the BBC Newsnight Programme in which Jeremy Paxman interviews President of Coca Cola Europe James Quincey. How much sugar is in a cup of Coke? A ‘small’ cinema serving is said to contain 23 teaspoons on sugar, while a large contains 44 – ‘each to be consumed in a single sitting.’ You can see the amount of sugar for yourself when Paxman pours out the sachets in each cup. Like with the tobacco industry quite a few years ago, the pressure is now on drink companies to reduce the amount of sugar in drinks because of the negative externalities of consumption that are associated with it.
Externalities on elearneconomics has written answers that allows students to recall information and apply it to assessment style questions. Immediate feedback allows for true student-centred learning and understanding.
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
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
With the increase in bulging waistlines and the rise in diabetes governments have been implementing taxes on surgary drinks to overcome this negative externality of consumption. The list of governments includes the following countries:
Hungary – in 2011 a tax on products with a high sugar content. The tax was calculated on the turnover of the company and the percentage of sugar per 100g of the product. Hungarian confectioners must pay the health tax on top of a 27% value added tax.
France – in 2012 a tax on all drinks with added sugar or artificial sweetener – US$0.08 per litre.
Mexico – in 2014 a tax on all sugary drinks of US$0.06 per litre. according to The Economist, in 2012 more than 70% of Mexican adults and 34% of 5-11 year olds were overweight and 12% of the population have diabetes which accounted for 14% of deaths in 2009.
Invariably the commercial sector believes that the government should not interfere with the market system and that consumers should be free to decide what to drink and eat. However the effect of a tax can be limited if the retailers absorb all the tax and therefore the price of the drink remains unchanged. Additionally a higher price because of the tax might not lead to any change in consumer behaviour as sugary drinks are very inelastic in nature to them.
In some cases the tax has been passed onto the consumer and it has had the desired effect. Coca-Cola’s Mexican bottler, blamed declining sales in 2014 on the price jump that followed the introduction of the tax. Overall sales of sugary drinks fell by 1.9% in 2014, having increased by an average of 3.2% a year over the three previous years. Some have said that reduced consumption has only saved Mexicans 5 calories a day on average and that the tax is regressive in that it takes more from the lower income groups than their higher income counterparts. Lower incomes were more responsive to the tax cutting their consumption of surgary drinks by 17% within a year of its introduction.
Different levels of tax.
As is the case with Hungary taxes that equate to levels of sugar or salt seem to be more effective with up to 40% of manufacturers adjusting their offending ingredients used. France and Mexico with their flat rate taxes for sugar content give the beverage industry little incentive to make it drinks healthier.
The Economist – Stopping slurping – November 28th 2015
One of the biggest threats to world health is that of obesity and sugar is the source of the weight gain amongst many people. It is ironic that sugar consumption was accelerated in the 1980’s after it were introduced into processed foods to deal with the health scare concerning saturated fats. Governments are now becoming more aware of this issue as it starts to absorb their health budget – UK spends £4bn on obesity related health issues. Norway, Mexico and the states of California and Illinois have introduced a tax on full-calorie soft drinks. Taxing sugar drinks does increase the cost of consumption and generates revenue to pay for the health costs that the overweight impose on society. But are there other options that they should be trying? Taxation might reduce some consumption but information about public awareness could be a more efficient option.
Information about sugar – a better solution?
A simple solution to obesity is to eat less and take more exercise. The World Health Organisation recently halved its recommended daily allowance, saying we should have no more than six teaspoons a day – less than one fizzy drink. However much of the sugar we consume is hidden within processed foods – high-fructose corn syrup which is a cheaper alternative to sugar. Food needs to be properly labelled and it is interesting to see the UK government are changing the way foods are labeled to assist shoppers to monitor their intake of harmful food using a simple traffic light system. But it doesn’t help that the US and EU governments still subsidise sugar production. However the real aim of focusing on sugar is that we start to lead healthier lives.