Dubai International Academy - 002730
Dubai International Academy
Economics DP Internal Assessment
Ms. Reena TIkku
Source of the Article:
http://news.yahoo.com/dietary-guidelines-panel-advises-policy-changes-soda-tax-215222455--politics.html?soc_src=mail&soc_trk=ma Title of the Article:
Dietary guidelines panel suggests tax on sugary foods
Date of Article:
February 20th 2015
Date Commentary Written:
Word Count (maximum of 750):
Commentary relates to ticked section of syllabus:
Section 1: Microeconomics
Section 2: Macroeconomics
Section 3: International economics
Section 4: Development economics
I certify that the attached work is mine alone and that information from other sources is properly referenced:
Tax on Sugary Foods
This article talks about how obesity is a big problem in America and how the American government have introduced a ‘Fat tax’ to counter this situation.
Market Failure occurs when there is an inefficient allocation of resources in a free market. Market failure can occur due to a variety of reasons, such as negative externalities (over-consumed) or demerit goods (usually not provided in a free market).
Negative Externalities are defined as the external costs incurred by third parties. They are the negative spillover effects borne by the society and not producers or consumers. Demerit goods are an example of goods that lead to negative externalities. Demerit goods are goods that incur social costs and are over provided and over produced by firms and the government discourages its distribution. Eg. Cigarettes and alcohol.
Sugary Foods is an example of negative externalities of consumption, where the consumption of the product causes the Marginal Social Benefit product to be much less than the Marginal Private Benefit. Marginal Private Benefit is the benefit received by the consumer by consuming one extra unit of the good. The consumer may benefit from consuming Pepsi or Oreos but society will not benefit from this.
Sugary foods, due to their addictively sweet flavors and lack of healthier substituents, tend to have a very low PED. Thus they are price inelastic. Price Elasticity of Demand is described as the relative change in the quantity demanded when compared to relative change in price.
A consumer of sugary foods is more likely to suffer from obesity or diabetes and thus, will be absent from work more often. They will not be able to contribute to the national income and firms will be inefficient. Furthermore, hospital care will be spent on the patients suffering from diseases caused by sugary foods. Foods and drinks such as Chips and Pepsi also come in plastic packets and cans. These items, if not discarded properly will degrade the environment by creating a dirty atmosphere and harming green life, insects and bacteria in the process.
Figure 1 shows how Marginal Private Benefit (MPB) is greater than Marginal Social Benefit at all quantities. Soda drink is being sold at a price of Pp at a quantity of Qp. The socially optimum level of price and quantity is Po and Qo. This graph shows that Soda Drinks are widely over consumed. To restrict this overconsumption, a system of tax on sugary goods has been introduced. This is also known as Fat Tax or Tax on Soda.
Fig.2 internalizing the externalities: Showing the effect of tax on MSB and MPC
From fig 2. We see that when a government imposes tax, the MPC shifts leftward to the MPC+tax, this reduces the quantity of soda drinks provided and also reduces deadweight loss. The increased price will lower the quantity demanded due to the law of demand.
Taxes could be very beneficial. Imposing a tax on Soda will increase the price of soda and put more of the burden on the producers, those who...
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