ECON200:Economics- Policy Frameworks And Markets - Assessment Answer

December 21, 2018
Author : Sara Lanning

Solution Code: 1CAB

Question: Economics

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Assignment Task

Economics Assignment

Your task is to analyse the implications of the exit of the United Kingdom from membership of the European Union. The object of the group report is to illustrate the application of economic concepts and theories to this real-world issue. Thus you will be required to review economic concepts that apply to your task, such as economic growth (i.e. GDP), unemployment and inflation, money and banking, monetary policy (interest rates and the money supply) and fiscal policy (government spending and taxing), and international trade (imports and exports) of goods and services.

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Solution:

Introduction

What is the economic rationale for introducing a tax on drink and food containing sugar?

Consumption of sugar sweetened beverages is associated with significant risk of cardiac disease, obesity of diabetes. So overconsumption of sugar is harmful to human health. High presence of sugar in the soft drinks can cause several health related issues especially obesity. Today obesity becomes a global health challenge across the world. A meta-analysis has observed a strong association between the in- take of sugar sweetened beverages and body weight. In order to combat such a challenge and protect human health, a tax on sugar is imposed. The imposition of sugar tax is an issue of debate for long as it has several economic and social consequences. The economic rationale can be examined with the concept of externality and market failure. Several market failures is observed for sugar sweetened beverages where social optimal consumption and production is less than private consumption. Government intervention is essential to correct the market failure. Market failure in sugar sweetened beverages exists due to various reasons.  The first reason is imperfect information: many consumers do not have proper information and thus unable to correlate the inter link between sugar consumption and its health consequences. Extensive marketing that apparently shows the perceived benefits of sugar sweetened beverage consumption further distort the decisions of the consumers. The second reason for the market failure is due to time inconsistent preferences – consumption decision offers short term gain but long term harm.  This problem is more acute with the children and the younger people who place greater value over the present satisfaction discounting the future consequences. Finally the externality is very much existed in Sugar sweetened beverage because the consumers do not pay the full cost of their consumption decision. If it is assumed that SSB has a significant contribution to obesity and other health issues that it will cause the health care costs to rise. Ultimately overconsumption of sugar leads to increase overweight and obesity related health care costs – only half of such medical cost is paid publicly by Medicare and Medicaid. The underlying principle of imposition of sugar tax is very simple: a tax will lead to reduce the supply and consequently increase the price of sugar. Higher the price less will be the consumption of sugar and the purpose of reduction in sugar consumption will be served (Brownell, 2009).

 

What does economic teaching suggest are the likely chances of a sugar tax being effective in reducing the consumption of these types of drink and food?

 In order to have an effective tax policy in the market, we need to first determine the type of tax (whether sales tax or excise tax), tax rate and above all which type of beverages must be taxed. Excise tax can be considered as a better option where the tax is imposed on the producers and felt by the consumers at the consumption point with higher retail price. Moreover tax can be levied on wholesalers rather than retailers because very few businesses can must comply with the tax. The tax on tobacco and alcohol further suggest that excise tax has a greater impact on consumption compare to advaolrem tax. Excise tax generates a significant amount of revenue and easy to collect.

Economic theory suggests the impact and the incidence of tax largely depends on the price elasticity of demand of the demand and the supply. The direct and indirect of effect of price change can only be estimated with the value of price elasticity of demand. Estimated study reveals that the price elasticity of soft drink stays in the range of -8 to -1. Thus they have a relative inelastic demand that implies the consumption is less responsive to price changes. If tax is imposed, the consumers will have to pay the larger share of the tax. If the price of soft drinks and other sugar sweetened beverages increased then there will be not much reduction in their consumption. But some consumers will definitely switch over to more diet beverages. According to a more conservative estimate if one cent tax is imposed per ounce then calorie consumption from sweetened  beverage will reduce by 10%- this is sufficient to minimize the risk of obesity and heart disease. The benefit would be more for the high volume consumers who are prone to overweight and very much responsive to price changes (Brownell, 2009).

A case in Mexico:

Mexican government has introduced a 10% levy in 2014 in order to reduce the consumption of unhealthy sugar sweetened drinks.  The evidence that sugar tax has a meaningful contribution in reduction of consumption is not much significant. Moreover the impact varies across the social group: poor people are likely to be more responsive to price changes compare to the rich people. Again, the sugar tax is found to be more effective in Mexico relative to UK and others because they spend a larger share on food and beverages. An average consumer in Mexico spends a larger share of their income on food consumption compare to an average consumer in UK. Since Mexican sounds a greater proportion on food consumption they are more responsive to price changes- as a result the sugar taxis likely to have a deeper impact on Mexico than UK (Sanders, 2016).

 What may governments do with the revenue raised by this tax in order to address the problem of obesity and disease?

If tax is imposed on sugar, it will generate substantial amount of revenue to the government. Actually tax is an important source of revenue for the government. Estimated study has shown that USD$876.1 million revenue is being generated in the state of Illinois alone with the proposed one cent tax on all sugar sweetened beverages. Thus sugar tax has vast economic implications as a revenue generator .Government can channelize and reinvest the tax revenue in healthcare sector. But there is no guarantee that the tax will be only utilized in the health care sector. Government may even use this revenue to cover some other expenses.  Higher health care resources will help to eliminate the problem of externality. Economists largely support the opportunity to reinvest the huge revenue in obesity prevention program. But the effectiveness of the policy issue must be addressed first. For example if the consumers shift their consumption pattern towards more unhealthy foods and drinks then it will undermine the effectiveness of the policy initiatives from the obesity prevention perspective. The cost effectiveness of obesity prevention as a fiscal policy measure needs more evidence. The definite conclusion cannot be done due to poor effectiveness of data. The introduction of fiscal policy as a measure of obesity prevention can be introduced but definitely not as a standalone measure (Marj, Sheppard & Sacks, 2013).

Is it ethical of governments to try to change our drinking and eating habits?

Dietary guidelines regarding the consumption pattern are provided by US government for health promotion and to prevent diseases. Consumption of more fruits, grains and vegetables and smaller amount of beverage and drink with high sugar concentration are the common guidelines for healthy life. The recommended diet is considered to be health promoting but at the same time it raises the considerable ethical issue that how far government can control our dietary choices.

In a market economy, any dietary choices are associated with some economic consequences for the food producers. For example, as US government is recommending a shift to more plant based diet, it will significantly affect the economic interest of agricultural producers, government agencies, related food industries, food and nutritional professional.  Ethical dilemma arise in the sense when dietary choices are recommended, it causes economic harm to some group of people or the society as a whole. For example if plant based vegetation diet is strongly recommended then the meat producers or the sea food producers will experience an adverse economic impact. Moreover it will do harm to the environment also. Some agricultural farmers will enjoy the benefit while others will experience economic harm, hence ethical dilemmas (Nestle, n.d)

Is it ethical of government to try to manage its financial obligations in the area of health expenditure by influencing our behaviors?

 Government is putting sincere efforts to influence our dietary pattern aiming to manage its financial obligation especially in the area of health care expenditure. The tax on tobacco, alcohol or the sugar sweetened beverages is the source of huge revenue for government.  This revenue would help government to meet the financial obligations in health care cost. The ethical dilemma can be raised that government is trying to influence our dietary habits due to its own interest. The principal ethical issues that arise in this perspective is the allocation of resources in the health care sector.  But I believe that it is ethical and government has the responsibility to protect the health of the nation. Health care cost is the single most factors that lies at the core part of the bankruptcy problem of the nation. Obesity is a major challenge and it drains a huge financial resources. If more people are inclining to have unhealthy food then larger part of the population will be obese and unhealthy. It hurts the well- being of the nation collectively. Thus it involves economic cost as well as social cost. Government should ban some unhealthy food, beverages and drink with the imposition of tax and encourage vegetable diets by subsidizing healthy fruits and   vegies.  Government can meet the financial obligation in the health care sector at least to some extent (School of Medicine and Public Health, n.d).

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