Economics Assignment on Sugar Tax: Rationale, Arguments and Evaluation

This economics assignment discusses the rationale for introducing sugar tax, external cost, demerit goods, raises revenue, shift in consumption and supply, arguments against sugar tax, evaluation of sugar tax and more.

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Economics Assignment
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Table of Contents
Introduction......................................................................................................................................2
Rationale for introducing sugar tax.................................................................................................2
External cost................................................................................................................................2
Demerit goods..............................................................................................................................3
Raises Revenue............................................................................................................................4
Shift in consumption and supply.................................................................................................4
Argument against sugar tax.........................................................................................................4
Greater burden on lower income group.......................................................................................5
Job losses.....................................................................................................................................5
Tax is not the best way to reduce consumption...........................................................................5
Evaluation of a sugar tax.................................................................................................................5
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Introduction
Excessive sugar intake is associated several health hazard such as diabetes, obesity, tooth
decay and such others. Unrestricted consumption of sugar inflicts cost on individual in terms of
lowering life expectancy. The cost not only limited to individual but also an external cost is
borne by the society. Society bears a cost in forms of a higher cost of health care and lower
productivity. A sugar tax is introduced to reduce consumption of sugar as a tax is expected to
discourage consumption (Tselengidis and Ostergren 2018). The revenue collected from the tax
can further be used for funding health care service. The case study discusses economic
arguments for introducing a sugar tax.
Rationale for introducing sugar tax
Implementation of a sugar tax is based on several economic rationales. The main
arguments in favor of sugar tax are given as follows
External cost
Sugar sweetened drinks have an external cost on the society. The excessive consumption
of sugar lead to several health problems including Diabetes particularly type 2 diabetes, obesity
and other illness related with obesity like heart diseases, back pain and tooth decay mostly
prevalent among people. External cost from overconsumption of sugar sweetened beverages is
reflected from a higher public expenditure for health care. The poor health condition adversely
affects productivity of workers (Backholer and Martin 2017). The social marginal cost of sugar
consumption thus exceeds that of the private marginal cost. The effect of a higher social
marginal cost is illustrated in the following figure.

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Figure 1: Effect of external cost
(Source: as created by Author)
Equilibrium under free market occurs at the point E. The acquired free market
equilibrium occurs where private marginal cost meets with private marginal benefit. Now, with
external cost, social marginal cost is higher than private marginal cost. The socially efficient
equilibrium point is thus different from private market equilibrium. Socially efficient equilibrium
point is at E1, obtained from the intersection of social marginal cost and social marginal benefit
(Baumol and Blinder 2015). In an unregulated condition, market thus is overproduced. A tax
equivalent to the external cost thus needs to be imposed to internalize the externality and ensure
socially efficient outcome.
Demerit goods

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Sugar drinks are classified as demerit goods. Demerit good is one, that an adverse
external effect on consumers but the damaging effect are ignored or unknown to the consumers.
Sugary drinks are considered as demerit good as such people might be unaware regarding the
harmful personal cost involved in consumption of sugar (Houghton and Houghton 2018).
Alternatively, it is also possible that people are aware of harmful consequences of sugar but are
unable to lower consumption of sugar followed by its addictive nature. In terms of sugar
consumption, Australia is one of nations having a very high sugar intake on an average.
Australians on an average consume 60 grams of sugar each day which is equivalent to 14
teaspoons of white sugar (Burrell 2016). People often take sugary drinks or food without
knowing how much sugar is in the drink or the processed food. Lack of awareness of harmful
consequences of sugar drinks is known as information failure. This is a problem in market
economies, where consumers do not have full information to make a choice.
Raises Revenue
Imposition of tax is associated with a benefit of raising the collected tax revenue for the
government. The added revenue can be used to fund public heath expenditure or in other social
welfare program (Purtle, Langellier and Le-Scherban 2018).
Shift in consumption and supply
A tax on sugar provides incentive to suppliers to supply some healthier alternatives.
When suppliers have an incentive to lower the supply of sugary drink and promote some healthy
alternatives, then buyers need to follow the trend in supply (Long et al. 2015). The effort of
suppliers and consumers jointly reduce consumption.
Argument against sugar tax

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Besides positive arguments in favor of a sugar tax, some economists also provide
arguments against imposition of such tax.
Greater burden on lower income group
The sugar tax affects disproportionately low income groups. A study based on Australia
suggests that yearly spending on sugary drinks under a tax of 20 percent averaged at $30 per
person. However, those belong to the lower socioeconomic groups pay $5 more a year compared
to richer group in the society (Davey 2018). The sugar tax is thus regressive in nature as it
imposes a higher burden on poor people.
Job losses
As the sugar tax reduces supply of sugary drinks, it causes many people to loss their job
in the industry. The Australia Beverages Council has reported that tax on sugar has little to do
with reducing obesity (Sharma et al. 2014). Rather it costs jobs which is again a frightening
message to the politicians. Politicians in Australia thus opposes a tax on sugar or sugar
sweetened beverages to reduce consumption of sugar.
Tax is not the best way to reduce consumption
Campaigners suggest policies other than taxes are more effective means of reducing
sugar consumption. These policies include banning of advertising at the Children and education
initiatives. A combination of tax, advertisement ban and education is the most efficient strategy
for controlling sugar consumption.
Evaluation of a sugar tax

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Figure 2: Impact of a tax on sugar
(Source: as created by Author)
The demand in the sugar market is given by the downward sloping line DD. The
corresponding supply curve is show as the upward sloping line SS. Without tax equilibrium is
obtained at E. Now considered a tax of rate t is introduced. The tax would shift the supply curve
inward to S1S1 by the amount of tax. In case of indirect tax, the burden of taxation is shared both
by buyers and sellers. The tax creates a difference between the price paid by buyers and price
that sellers receive (Friedman 2017). Before tax, price in the market was P*. Tax raises the price
that buyers pay to P1. The higher price induces buyers to reduce the demand for sugary drinks.
Sellers however receive a lower price compared to pre-tax. Price to the sellers reduce to P2. The
lower price lowers the profitability of suppliers. Both buyers and sellers receive a lower surplus
compared to pre-tax situation. Revenue to the government from the imposed tax is given as

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P1P2FG. Portion of revenue contributed by the buyers is P1P*E1F. Part of revenue contributed by
the sellers is P2P*E1G. Quantity in the market reduces from Q* to Q1. The imposed tax though
reduces sugar consumed in the market, society however suffers a welfare loss called dead weight
loss indicated by the triangle EFG.
Conclusion
The discussion leads the conclusion that, a strong economic, personal and political
benefit exist from implementation of sugar tax. The imposed tax encourages a healthier diet. The
tax at the same time increases revenue to fund health costs for obesity and other health hazards
results from excess consumption of sugar. The arguments however are counter attacked by some
opponents. There is a potential job loss in the soft drink industry that experienced a decline in
demand. Another vulnerable group to sugar tax is the poorer section of the society who ended
with paying a relatively higher share of tax.

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References
Backholer, Kathryn, and Jane Martin. "Sugar-sweetened beverage tax: the inconvenient
truths." Public health nutrition20, no. 18 (2017): 3225-3227.
Baumol, William J., and Alan S. Blinder. Microeconomics: Principles and policy. Nelson
Education, 2015.
Burrell, Susie. 2016. "New ABS Data Reveals How Much Sugar Australians Really Consume".
Newscomau. https://www.news.com.au/lifestyle/health/diet/new-abs-data-reveals-how-much-
sugar-australians-really-consume/news-story/979263910569a4c55bb0051551bdce1a.
Davey, Melissa. 2018. "Sugar Tax: Why Health Experts Want It But Politicians And Industry
Are Resisting". The Guardian. https://www.theguardian.com/australia-news/2018/jan/10/sugar-
tax-why-health-experts-want-it-but-politicians-and-industry-are-resisting.
Friedman, Lee S. The microeconomics of public policy analysis. Princeton University Press,
2017.
Houghton, Frank, and Sharon Houghton. "Ireland's new sugar tax: a step in the right
direction." The New Zealand Medical Journal 131, no. 1470 (2018): 97-98.
Long, Michael W., Steven L. Gortmaker, Zachary J. Ward, Stephen C. Resch, Marj L. Moodie,
Gary Sacks, Boyd A. Swinburn, Rob C. Carter, and Y. Claire Wang. "Cost effectiveness of a
sugar-sweetened beverage excise tax in the US." American journal of preventive medicine 49,
no. 1 (2015): 112-123.

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Purtle, Jonathan, Brent Langellier, and Félice Lê-Scherban. "A case study of the Philadelphia
sugar-sweetened beverage tax policymaking process: implications for policy development and
advocacy." Journal of Public Health Management and Practice24, no. 1 (2018): 4-8.
Sharma, Anurag, Katharina Hauck, Bruce Hollingsworth, and Luigi Siciliani. "The effects of
taxing sugar‐sweetened beverages across different income groups." Health economics23, no. 9
(2014): 1159-1184.
Tselengidis, Arsenios, and Per-Olof Östergren. "Lobbying against sugar taxation in the European
Union: Analysing the lobbying arguments and tactics of stakeholders in the food and drink
industries." Scandinavian journal of public health (2018): 1403494818787102.