Business Economics Case Study: Market Imperfections & Sugar Tax

This case study delves into business economics, analyzing the effects of market imperfections and market failure on entrepreneurship, labor, and financial products. It explores how these factors influence business activities and decision-making. The study further investigates the impact of the UK's sugar tax policy on business strategies, including pricing, marketing, and production adjustments made by companies like Coca-Cola and others in response to the tax. The case study examines how companies have adapted their strategies to mitigate the effects of the sugar tax, such as reformulating products, introducing sugar-free alternatives, and adjusting their product lines to maintain profitability and customer satisfaction. It also discusses the importance of managers' decisions in navigating economic changes and maintaining business growth.

CASE STUDY BUSINESS
ECONOMICS

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1. effect of market imperfection and market failure over the entrepreneurship activity, labour
and financial products.............................................................................................................3
TASK 2............................................................................................................................................5
Impact of sugar tax policy on decision making and business strategy...................................5
CONCLUSION ...............................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Business economics is an approach used to analyse and evaluate affect of different
economic situations on business organisations. Economic situations arises due to change in
taxation policy, increase in inflation rate and unemployment rate. Business Economics also helps
company in formulating business strategies. Below case study includes market imperfection and
market failure on new business ventures, employers and different types of financial products
used in companies. Further, this case study explains impact of introduction of Sugar Tax Policy
regulated by government of UK on business strategies and management decisions of companies.
TASK 1
1. effect of market imperfection and market failure over the entrepreneurship activity, labour and
financial products
Market imperfection
Market imperfection is situation in which customers do not have accurate knowledge
about the market. This situation does not contain a perfect competition (Economic Markets and
Market Imperfections, 2018). Further, as per the market imperfection theory, in the situation of
market imperfection, the market fails to meet the rigorous standards of perfect competition. In
addition, it also contains high leveled barriers regarding entry and exit.
Market failure:
An economic condition in which supply of products and services fails to meet the need,
demand and requirement of the customer, can be termed as market failure. This situation is being
causes due top inefficiency of the suppliers or companies in allocation of their resources and
determination of actual needs and demands of their customers.
Both situations, i.e. market imperfection and market failure have a major effect over the
entrepreneurship activity, labour and financial products as well.
Effect over entrepreneurship activity:
Due to market imperfection, entrepreneur fails to derive the actual market condition. It
may cause in developing wrong perceptive towards any specific market. It would result in
selection of wrong market for doing business and development of ineffective strategies for the
business as well. Further, due to inappropriate and improper information of the market,
entrepreneur may fails to detect the actual demand and requirement of the industry, due to which
they may fail to fulfil the needs and demands of their potential and targeted customers.

Effect over labour activity:
Market imperfection in labour activity leads to shortage of labour supply in the market
which adversely affect the operational efficiency, performance and productivity of the business.
Market imperfection will lead to unproductive labours (Labor market imperfections, mark ups
and productivity in multinationals and exporters, 2019). It also leads to large number of
competition in the market. Market imperfection influences training and adversely affect the
competition in the market. Market is imperfect every individual has different need in the market
due to which employees has to produce new and innovative products for higher competitive and
sustainability growth and development of the product. Market failure will lead to high demand of
labour at higher price and also it adversely affects the economy and operational efficiency and
productivity of the company. Labours do not have perfect knowledge about the market which
leads to lower operational efficiency and standards. Market imperfection leads to lower demand
of production services by company which in turn reduces the income of consumers. That
indirectly effect employment and labour market (Introducing Market Failure, 2019). Market
failure leads to shortage of supply of labour and fails to meet the need, demand and requirement
of the customer which eventually leads to market failure. Market failure leads to lower revenues
and the lower revenue affect the market economy which leads to unemployment and lower salary
for the labour activity.
Effect over financial products:
The derivatives one of the financial product which are derived from existing asset and financial
products. These derivatives are categories into two parts one is forwards and other is options.
The forwards are contracts which delivers financial benefit at some future point. Options are
contracts which give financial contract to both parties and right to earn benefits in the future. The
company affects a lot from changing in price of such derivatives options.
The futures refer to buy and sell financial commodity at some future point, but the condition is
that the price remains fixed which is agreed at time of contract. This will help the company to
protect loss from fluctuations in exchange rates (Hawasli, 2018).
A mutual fund is a professionally managed type of collective investment scheme that pools
money from many investors and invests it in shares, bonds, short-term money market
instruments, and/or other securities. If the rate of mutual fund goes down then the company can
bear loss as many investors will withdraw there investment from the company. It can hamper the

profitability aspects of the firm (Karayazi Atici, 2015). Also, the investors has to bear the loss
which can also hamper the goodwill of company. The market value of the firm can get down.
The various types of mutual funds can be equity, gold, debt and money. Also, the firm needs to
take care of mutual funds most in the time of recession.
TASK 2
Impact of sugar tax policy on decision making and business strategy
Sugar tax is imposed by government of United Kingdom on companies which are
offering drinks with high amount of sugar. This tax is introduced in 2018. According to this tax
rate is imposed according to level of sugar in drinks. This tax is introduced to decrease
consumption level of sugar as it creates many health problem in individuals. Higher the sugar
content higher will be the tax rate. Thus, introduction of this taxation policy has an impact on
business strategies & decisions of management as companies needs to change their production
process which in turn affects decisions of managers(Castaño, Méndez and Galindo, 2015).
Sugar Tax enhances tax revenue of government of UK to £520 million which is used in
development of sports in primary schools. Due to this taxation policy pricing strategy,
marketing strategy and production strategies of various drink producer changes which in turn
facilitate a change in overall business strategy of companies. Companies such as Coca-cola and
Pepsi are changes their business strategy.
For Example- Pricing strategy of Coca Cola is changed like Prices of Coke of £1.25 get
raised to £1.49 because of increase in cost & expenses of company. For changing price of
product financial manager of company need to revise budget plan and make change in all type of
cost such as marketing expenses, production expenses and other expenses which are not
necessary. So profits of company does not gets affected. Further, Coca-cola also maximises price
of its regular Can.
With this introduction of this tax consumption of drinks is reduced through which
customer base and profits gets declined. This also leads to change in business strategy as
managers now use innovative ideas & techniques to promote its products. For Example- Coca-
cola gives advertisement through different modes such as Television, Social sites and Print
Media. It is now mainly focuses on improving its production strategy which helps in attracting

customers and in its advertisement company also focuses on giving details of ingredients used.
Further, it is also promoting its products by giving advertisement that this product is not harmful
and contains less amount of sugar.
Further, Coca-cola is not reducing level of sugar in its products beside that it is
introducing sugar free drinks. Production strategy of company is as it is now adding more types
of products in its product line. Further, managers of company makes decision to impose burden
of tax on customers which leads to an increase in price of its products.
Managers of coca-cola are also making strategies by collaborating with other food
companies by offering coke with their food items. This helps comp[any in increasing its sales
volume and create awareness among individuals. This strategy helps firm in managing its
profitability(Saleem, 2017).
Managers are also making decisions to produce drinks which contains milk in it as there
is no duty of tax levied on drinks which contains milk. Managers of various companies such as
Iru Bru, Lucozade, Fanta and Ribena chaged makes decision and changed their production
strategies. Thus, they not need to pay this duty to government of United Kingdom. Further, this
decision of manager attract customer and that enhances demand of products of these companies.
For Example, Iru Bru company also introduced sweetner-Iced flavour of Fizzy in which
level of sugar is reduced by 54%. This reduces its overall cost which in turn maximises overall
profits of company. Firms also reduces level of sugar from 0.3g per 100ml to 4.7g. With this
product strategy and revenue strategy of company is managed. No sugar tax is levied upon Pure
Fruit Juice thus, various companies are making decisions to increase production of fruit juices.
For Example- Coca-cola is offering Slice to reduce its tax burden. Diet Coke and Coca-cola Zero
is tax free products and company is highly focusing on promoting this products are exempt from
Sugar Tax Policy. With this promotion strategies of company is also developed(Serra and Kunc,
2015).
Companies are changing their cold drinks recipe with this managers are required to make
decisions as to what type of contains can be used by replacing sugar and what is cost of new
production materials used in production process. According to that managers make decisions
related to investment in different activities so that product is produced with minimised cost and
companies can earn after paying all its tax liabilities.

Companies need to change their business strategies as customers are their assets and if
offering s of companies products affects health of customers than that adversely affects brand
image and customer base of companies. Thus, decisions taken by managers are required to
satisfy needs of customers and society.
Business strategies and managers decisions are in shape as companies change their
strategies in according to change in economic factors which affects profits, production, demand
and supply of products & services of company. Managers also analyse impact of different
situations and make decisions which are in favour of companies growth and
development(Castaño, Méndez and Galindo, 2015).
CONCLUSION
The above report summarise meaning and effect of market imperfection & failure on
different types of entrepreneurship activities, employers and financial products provided by
companies. Further, this report outlined impact of Sugar Tax Policy on decisions made by
managers and strategies formulated in business with example.

REFERENCES
Books and Journals
Matt, C., Hess, T. and Benlian, A., 2015. Digital transformation strategies. Business &
Information Systems Engineering. 57(5). pp.339-343.
Serra, C.E.M. and Kunc, M., 2015. Benefits realisation management and its influence on project
success and on the execution of business strategies. International Journal of Project
Management. 33(1). pp.53-66.
Saleem, M.A., 2017. The impact of socio-economic factors on small business
success. Geografia-Malaysian Journal of society and space. 8(1).
Castaño, M.S., Méndez, M.T. and Galindo, M.Á., 2015. The effect of social, cultural, and
economic factors on entrepreneurship. Journal of Business Research. 68(7). pp.1496-
1500.
Hawasli, A., 2018. azureLang: a probabilistic modeling and simulation language for cyber
attacks in Microsoft Azure cloud infrastructure.
Karayazi Atici, O., 2015. The Role of Prolactin in the Cellular Response to DNA Damaging
Agents (Doctoral dissertation, University of Calgary).
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Financial products. 2018. [Online]. Available through : <https://www.karvy.com/distribution-of-
financial-products/>.