UK Sugar Tax Economic Policies and Business Strategies

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BUSINESS ECONOMICS
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Table of Contents
LIST OF FIGURES.......................................................................................................................3
INTRODUCTION........................................................................................................................4
TO DEVELOP A CONSTRUCTIVE AND DETAILED SUMMARY OF THE CASE STUDY WITH CLEAR
EXPLANATION OF HOW MARKET IMPERFECTIONS AND MARKET FAILURE CAN AFFECT
ENTREPRENEURSHIP ACTIVITY, LABOUR AND FINANCIAL PRODUCTS WITH RELEVANT
EXAMPLE.................................................................................................................................. 5
TO PROVIDE A LOGICAL INTERPRETATION OF HOW THE UK GOVERNMENT SUGAR TAX
ECONOMIC POLICIES CAN SHAPE BUSINESS STRATEGY AND DECISIONS MADE BY
MANAGEMENT.........................................................................................................................8
CONCLUSION.......................................................................................................................... 11
REFERENCES........................................................................................................................... 12
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LIST OF FIGURES
Figure 1 Relative Change in Obesity.........................................................................................7
Figure 2 Change in the Demand and Price due to Sugar tax....................................................9
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INTRODUCTION
In this report, the discussion will be made on the industry of soft drinks which is the most
important sector in the UK economy. In this report, it is given that the government of the UK
has levied the tax in the sugary drinks. It will also present an in-depth understanding of the
sugar tax that how it affects the market of the soft drinks and how the consumers are
affected by the same. There are also some potential changes in the patterns of the
consumption and the implication of the total intakes of the calories. All this has also affected
the contribution of the industry economically.
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TO DEVELOP A CONSTRUCTIVE AND DETAILED SUMMARY OF THE
CASE STUDY WITH CLEAR EXPLANATION OF HOW MARKET
IMPERFECTIONS AND MARKET FAILURE CAN AFFECT
ENTREPRENEURSHIP ACTIVITY, LABOUR AND FINANCIAL PRODUCTS
WITH RELEVANT EXAMPLE
In the given case study, the emphasis has been laid upon the tax that is to be implied on the
sugary drinks and other confectionery products which will contribute to reducing the
obesity in the UK. The government of the UK formulated the strategy with a view that by
implementing the fiscal policies in the sugary items will lead the benefit in the health of the
public as this will directly reduce the purchase as well as the consumption of such products
and also will reduce the demand of the related sugary snacks and drinks. In the research, it
has been found that around 17 gram of the sugary snacks are bought by the people of the
UK which is double than the sugary drinks (Wilson and Hogan, 2017).
The benefit that will be analysed from the proposed planning of sugar tax will be that the
companies producing the sugary drinks will reformulate the drinks as the cost of the
production of the drinks will be increased. The companies such as Irn-Bru, Sprite, Fanta has
changed their drinks by decreasing the content of sugar. There is the intake of around 74.3
grams per day of sugar by the age group of 11-18 years which leads to obesity among the
children and adults too (Marten et al., 2018).
The market failure occurs due to the failure in the price mechanism and due to failure in the
optimum supply of the products in the market. The reason behind the market failure is the
demand as well as the supply of the quantity of the products that will reflect the additional
benefit of the consumption. This disproportion reflects the inefficiency in the consumption
of the products (Johnson, 2015).
Due to the market failure, the entrepreneurs have hugely affected and so the employment
of the UK economy. As there are around 2,30,000 people employed in the soft drinks
industry among these approx. 55% of the jobs are on-trade and around 39% are the off-
trade retailers. 7% are the manufacturers and all this affects around 27% contribution in the
GDP of the soft drinks industry (Wilson and Hogan, 2017).
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One of the most important factors that cause market failure is due to the externalities
An externality is that cost or advantage from the performed transaction that affects either
of the party to the transaction. The example of this could be the pollution. Costs related to
cleanings and health that results from pollution impacts every member of society.
Figure 1 Relative Change in Obesity
(Source: Zala, 2018)
The above graph represents the relative change in the obesity of men and women due to
the 20% tax levied on the sugary soft drinks.
For instance, during the purchase of the Fizzy Drinks by the customers, they do not bother
about the negative factors that affect the third parties. There are various diseases involved
in this such as the diseases related to obesity, diabetes, along with reducing the efficiency of
the labours and also increases the absenteeism from the manufacturing organizations.
During 2014, the overall obesity in the world was around £1.3 trillion. In the UK it was only
around £50 billion (Guerrero-López et al., 2017). The negative externalities if avoided by the
consumers would also enhance the expenditures towards the soft drinks. Thus, in short, this
would raise the consumption of the drinks that contain sugar which leads to the loss in
welfare and failure in the market (Marten et al., 2018). When the consumers do not have
the proper guidance related to the products then also they consume the products which
cause the diseases. If a person consumes more sugar it will reduce the life span and will also
increase the risk of heart disease. Due to this the earning capacity of the people also gets
reduced. There are various campaigns organized by the government and the schools in
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order to make the people as well as the children aware about the high consumption of sugar
leads to the obesity and thus causes the various diseases. Though there are some
consumers and the people who ignore such facts and consume the sugary drinks by ignoring
the long term (Wilson and Hogan, 2017).
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TO PROVIDE A LOGICAL INTERPRETATION OF HOW THE UK
GOVERNMENT SUGAR TAX ECONOMIC POLICIES CAN SHAPE BUSINESS
STRATEGY AND DECISIONS MADE BY MANAGEMENT
With the help of the strategies formulated for levying the tax policies on the consumption of
the sugar has positively and negatively affected the business strategies of the soft drinks
manufacturing companies. This has increased the cost of production and thus increased the
cost of the final product (Guerrero-López et al., 2017). This has ultimately decreased the
demand for the drinks as due to the increase in the price of the products and also due to the
fear of obesity.
Figure 2 Change in the Demand and Price due to Sugar tax
The increase in the price of the sugary drinks due to the tax has decreased the demand for
the products of the soft drinks. The price has reached from P1 to P2 i.e. it has increased,
thus the demand has decreased which is down in the above diagram from Q1 to Q2. This
positively impacts obesity reduction and reduce market failure towards the tax implication.
The government has also planned to provide the incentives to the manufacturing
companies, to reduce the content of the sugar in the soft drinks thus to reformulate the
sugary drinks in order to reduce the levy of tax i.e. the sugar tax on their products (Bes‐
Rastrollo et al., 2016). For example, if the manufacturing company of the soft drinks reduce
the consumption of the sugar in the products to about 8 grams per 100 ml, then they have
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to pay the tax of around 6p on each cane. And if the level of the sugar is below 5 grams,
then they are free from paying the tax on the drinking products (Zala, 2018).
Thus the manufacturing companies of the drinking products have started using the policy of
indirect tax for reducing the consumption of sugar. As the government has implemented the
rule of levying a tax on the consumption of the sugar it has forced the manufacturing
concerns to operate the business and reformulate the soft drinks. Thus the business
strategies are hugely affected by the policy formulated by the government (Jones, 2016).
The taxation policy of the government affects the costs of the business. For example, the
rise in the sugar tax has increased the cost of production of the manufacturing companies.
This indirectly leads to an increase in the final price of the product. The sugar tax on the
drinks which is known as the sugar tax has impacted overall 50% of manufacturers to reduce
the sugar content from the products (Jones, 2016).
For example, brands like coca cola and Pepsi have positively impacted their business
strategies and has increased their productivity on a regular basis even after the government
of the economy has laid the sugar tax. It has been studied from the research that the
companies have increased their prices of the drinks due to the sugar tax. To reduce the
sugar tax, the companies have formulated the strategies to reduce the content of the sugar
and ultimately this increased the revenue of the soft drinks by £5 million to £167 million
within a week after the introduction of such taxation policy. Thus the taxation policy of the
sugar tax has not heavily impacted the sales of the drinks in the UK (Bes Rastrollo et al.,‐
2016).
There are various products of the Coca Cola that are reformulated so that the tax
percentage can be brought down.in the year 2017, the sales of Fanta drinks increased by the
rate of 14%. On the other hand, reformulating the Lucozade energy drink due to the sugar
tax, decreased sales by 8.1% (Backholer et al., 2017).
Pepsi has been the leading company in the market by producing the sugar-free drink named
Pepsi Max. This product was taken over by the Diet Coke and became the largest sugar-free
drink of cola in the market of UK (Delves, 2018).
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During the introduction of the tax, there were various techniques used by the businesses to
recover the losses that they suffered due to the increase in the cost of production and which
reduced the demand of the products in the market. There are some of the stores and the
pubs that started to use sugar-free and the products of fizzy drinks that contain less sugar in
order to keep the prices of the drinks lower and can attract more consumers. Apart from
these they also offer high-intensity sugar products if the demand of the same is there
among the consumers (Backholer et al., 2017).
Thus to maintain the demand of the soft drinks in the market, the businesses have
formulated various strategies such as reformulating the drinks, by decreasing the content of
the sugar from the drinks and thus this leads to the decrease in the production cost and also
increase the demand of the products as the consumers will feel safe that they are not being
suffered from the obesity (Backholer et al., 2017).
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CONCLUSION
Thus in this report, the emphasis has been given to reducing the obesity among the people
of the UK by levying the sugar tax on the soft drinks. This will make the manufacturing
concerns to reformulate the soft drinks. Thus due to adding the tax the cost of production
increases and thus the final price increase. Due to this, the demand of the soft drinks falls
and thus it positively impacts on the strategies implemented by the government by
improving the health of the people in the UK by reducing the problem of obesity.
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REFERENCES
 Backholer, K., Blake, M. and Vandevijvere, S., 2017. Sugar-sweetened beverage
taxation: an update on the year that was 2017. Public health nutrition, 20(18),
pp.3219-3224.
 Bes Rastrollo, M., Sayon Orea, C., Ruiz Canela, M. and Martinez Gonzalez, M.A.,‐ ‐ ‐ ‐
2016. Impact of sugars and sugar taxation on body weight control: A comprehensive
literature review. Obesity, 24(7), pp.1410-1426.
 Delves, A., 2018. One month into the sugar tax, here's what it means for small
businesses. Online available at
(https://www.simplybusiness.co.uk/knowledge/articles/2018/04/sugar-tax-for-
small-business/). Last accessed in May 2019
 Guerrero-López, C.M., Molina, M. and Colchero, M.A., 2017. Employment changes
associated with the introduction of taxes on sugar-sweetened beverages and
nonessential energy-dense food in Mexico. Preventive medicine, 105, pp.S43-S49.
 Johnson, M., 2015. Public goods, market failure, and voluntary exchange. History of
political economy, 47(suppl_1), pp.174-198.
 Jones, C.M., 2016. The UK sugar tax–a healthy start?. British dental journal, 221(2),
p.59.
 Marten, R., Kadandale, S., Butler, J., Aguayo, V.M., Axelrod, S., Banatvala, N.,
Bettcher, D., Brumana, L., Buse, K., Casswell, S. and Dain, K., 2018. Sugar, tobacco,
and alcohol taxes to achieve the SDGs. The Lancet, 391(10138), pp.2400-2401.
 Wilson, P. and Hogan, S., 2017. Sugar taxes: A review of the evidence.
 Zala, D., 2018. Regional and district peer effects in obesity: A UK panel data analysis.
Health & social care in the community, 26(1), pp.35-40.
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