Economics - Coca Cola - Macroeconomic Theory - Assessment Answer

Economics Assignment

Assignment Task

People becoming obese due to sugary drinks like coca cola and other soft drinks is an externality created by the consumption of these soft drinks quite often without control. When people become habituated with these soft drinks, they consume it quite often and this leads them to become obese and other health related problems crop up. The result is more people become sick due to obesity problems and could not be able to do their normal activities. This is a kind of market failure. It has to be corrected by taxation on sugar which is an important input in the preparation of these soft drinks. This has already been done in countries like France and Mexico. The economic effects of this market failure and the government intervention through taxation is being discussed in this paper.

Why is coca cola consumption an externality?

A market failure is a condition where the marker forces of demand and supply of a good intersects to create an equilibrium quantity that is greater or lower than socially optimal level of output. Socially optimal level of output is that output level that takes into accounts the social marginal costs and social marginal benefits (Layton and Robinson, 2012). There are two types of costs and benefits – marginal private costs and marginal social costs; marginal private benefits and marginal social benefits. Marginal private benefit is the individual benefit that is reaped from consuming the good and marginal social benefit is the private benefit and the external benefit occurring on the third parties due to the consumption of a good. When marginal private benefit is greater than the marginal social benefit, then there is a negative externality of consumption. When marginal private benefit is lower than the marginal social benefit, then there is a positive externality of consumption (Pettinger, 2010). Similarly when the marginal private benefit of consuming a good is higher than the marginal social benefit, then there is negative externality of consuming a good. Hence we can define negative externality of consumption as the situation where the private benefits of consumption of a good are greater than the social benefits of consumption of that good which has resulted in spill over costs that are borne by the society. For example, when more people drink sugary drinks, which are highly concentrated in sugar and carbohydrates, they tend to become diabetic and obese and are prone to a large number of health related issues that might affect their productivity.

Negative externality of coca cola consumption:

In the above figure, we can see that the marginal private benefit is represented by MPB is higher than the marginal social benefit represented by MSB. Hence the quantity consumed of soft drinks and sugary carbonated drinks by the people would be more than the socially desired level Qs. This results in obese children and adults and can have negative spill over effects on the people which is not accounted for by the market forces. Hence this causes a market failure.

Thus government have to impose taxes in order to internalise this negative externalities so as to reduce the quantity consumed of the commodity in the economy. Soft drinks or carbonated drinks have severe negative health effects on people and can be the root cause for many disorders and diseases. There is an increased risk of health disorders while consuming these carbonated soft drinks as these contain high percentage of sugar which might lead to overweight in children and obesity in adults. And this can lead to type 2 diabetes, heart diseases and also osteoarthritis. (JOHN, 2015). Much health researchers have highlighted the harmful effects of soft drinks and their health impacts over the long run. The main among these health effects are hearth diseases, obesity, bone weakening etc. (Willett, 2015). All these point out to the fact that somebody has to have a check or control this overconsumption of soft drinks which has emerged as a market failure in many countries.

There are many instances like controlling pollution by a tax imposed by the government and promoting vaccination (which is a positive externality) by provision of a subsidy. As consumption of sugary soft drinks is a negative consumption externality, government takes an action of imposing a tax on these soft drinks which might increase the price of the product and also decrease the consumption of the same. However, it might happen that the burden of such a tax can be passed on to the consumer. Whether the tax is imposed on the product such as coca cola or on the sugar (an important ingredient in the production of coca cola) this shifts the supply curve to the left as shown in the figure below and hence this will result in the lower consumption of the soft drinks.

In the above figure, an imposition of a tax on the soft drinks will shift the supply curve to the left at ss + tax. This will result in the lowering of consumption of soft drinks from Qp to Qs. And increase in the price of the soft drinks sold. The resulting reduction in the consumption of soft drinks might reduce the problem of negative externalities of adverse health impacts on people.

The move from the Osborne government to impose a levy on sugar in order to control the coca cola production and consumption is a welcome move for correcting a market failure (Butler, 2016). This shows that the policy makers are aware of the devastating effects of the overconsumption of carbonated sugary drinks that has potential health implication for the public. This is an apt move from the UK government to take action on the overproduction of a commodity which is a market failure.

There are many countries which have already imposed such sugar taxes. Among them are Mexico, Hungary, France, and Finland. And others like South Africa, Indonesia, India, and Philippines are among those countries which are considering such a tax on unhealthy foods (Fisher, 2016).

The problems and benefits of such a Tax:

There are associated problems for imposing a sugar tax. These are assigning the right amount of taxation that will internalise the negative externality (Hubbard et al., 2013). There is no guarantee that the tax levied will totally internalise the external costs or benefits it might have on the society. The second problems with such taxes is that the producers of coca cola might pass on the tax to the consumers if the demand for such soft drinks are highly inelastic. This might result in only reducing a small amount of demand for soft drinks as the consumers are willing to pay higher prices associated with the tax imposed.

The benefits of imposing such a tax on sugar which is an important ingredient in production of coca cola or other soft drinks is that the costs of production would go up and the producers may reduce the usage of sugar or look for healthier substitutes to use in their products. There has been growing evidence that consumption of sugar at high levels (like in soft drinks) have many adverse health problems in those consuming them. It also causes tooth decay and weakening of bones apart from heart diseases and diabetes.

The tax revenue from sugar tax can be used to create awareness about the harmful effects of consuming soft drinks. Such awareness should be created in schools and colleges and also among the general public. It has been found out by researchers that in Mexico, such a levy of sugar tax has reduced the consumption of sugary drinks by 12%. And this was more among the lower income groups who were unable to meet the higher prices of sugary drinks (Arantxa et al., 2016).

Taxation only become effective when the proceeds collected from such a tax is used to create awareness of the potential harm that would be created from consumption of sugary drinks (Layton and Robinson, 2012). The major problems in imposing such tax are the assessment of the tax level which would effectively reduce the externalities of health impacts of the sugary drinks. Similarly it might able become ineffective if the demand for sugary drinks are inelastic such that the tax burden would be shifted to the consumers as hike in prices. Bad habits such as cigarette smoking, alcohol consumption and consumption of soft drinks tend to have an inelastic demand particularly. For middle income and higher income groups of people, facing a higher price for the consumption of coca cola might not be a problem. But for lower income groups who might not be able to afford the hike in prices will tend to get frustrated and leave the habit of consuming soft drinks as was noted in Mexico.

Conclusion:

This paper has analysed the economic concepts of marginal private benefits and marginal social benefits and how the consumption of soft drinks causes negative externalities of consumption in UK. It also has analysed how the imposition of a sugar tax might result in efficient allocation of resources and correct the market failure. The problems associated with such a tax however is the fixation of the right level of tax that would internalise the externality. The negative externalities of consumption whether it be of alcohol, or of soft drinks have to be internalised with such taxes. However for effective implementation, it should also be taken into account that awareness among the public about the harmful effects of soft drinks consumption and making them to prefer healthier drinks would be more helpful in reducing the consumption of sugary drinks. Globally all the countries are moving towards imposing taxes on soft drinks and carbonated drinks as these decrease the productivity of the workers and create devastating health impacts.