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The South African government has declared that from April 1st, 2017, there would be a sugar tax of 20% imposed on all sugary soft drinks. The sugar tax is an attempt “to help curb the country’s growing obesity epidemic”, and to correct the negative externalities of soft drinks. The consumption of these beverages creates negative spillover costs to a third-party, in this case, an increase in obesity, diabetes, and other health problems. If more of these health problems arise, public and private healthcare systems will have to deal with these issues, leading not only to an increased burden on healthcare systems, but an increase in health expenditure for the South African government.The diagram above is a negative externalities of consumption diagram prior to April 1st, 2017. This means it represents the corresponding spillover costs, expressing the external costs and how there is an overconsumption of sugary drinks, leading to a welfare loss. This is due to the marginal social cost being larger than the marginal social benefit, indicating too much of the good is being consumed. The government requires a remedy to correct this imbalance to the point where all resources are allocatively efficient, at the point MSB = MSC on the graph. This is where social surplus is maximised, correcting this negative externality and decreasing the loss to society.The graph above displays the expected results of imposing the sugar tax on sugary drinks. The government has the intention of decreasing the quantity demanded for the drinks, as “on average, a South African had consumed 254 Coca-Cola-type drinks in 2010, compared with the global mean of 89”. The marginal social cost line is shifted upwards as a result of the 20% tax on the demerit good. This means that for any given price, there is an increase which must be paid. Although this taxation directs the price towards an elevated level from the socially optimal price, the new price point causes a leftwards shift in the quantity, progressing closer to the socially optimal quantity value, decreasing the loss to society.Therefore, we can conclude that the taxation imposed on sugary drinks can be seen as one valid solution to the issue of obesity on economic grounds, as the tax would ultimately lower the quantity demanded of soft drinks, and thus the obesity rate. With the inclusion of the sugar tax, the advantages of the policy would be the reduction of unhealthy beverage choices among society, thus leading to a decrease in obesity, and an increase in tax revenue. This taxpayer money could then be used to further discourage the drinking of beverages alike through advertising displaying the correlation between soft drinks and obesity, or programs to help limit corpulence. Looking at the policy from a standpoint of priorities, the government is no doubt acknowledging obesity as a definite threat to society as the policy benefits the entire country, thus a good choice for the long-term macro economy.On the other hand, the disadvantages are that apart from the higher price, the government doesn’t incentivise an increased consumption of healthier goods, and the policy overlooks and fails to tax similarly unhealthy beverages such as high-sugar content fruit juices or energy drinks. In the short run, individuals may be discouraged from purchasing the demerit good, however in the long run, due to the addictive qualities of sugary drinks, regular purchasing of the drink may begin to resume, and the sugar tax may even be removed due to long-term ineffectiveness. Stakeholders such as consumers would be required to increase their household budgets, and producers would have no control over the tax. If the policy is successful, producers would see an overall decrease in quantity demanded for their goods, leading to a decline in profit. Furthermore, the tax is relying on the basis that there are no external factors, or where ceteris paribus is in place. For instance, the surge in price of soft drinks may spark decreased sales, which may lead to stores abandoning the sales of goods.In conclusion, it is clear that with the implementation of the tax, society would see benefit in accordance to the decreased loss to society, as the quantity reduction in demand would further contribute to a recession of obesity rates, further fortifying a healthier society with less health complications and a reduced burden on healthcare systems. Additionally, the tax revenue could be used to create programs that promote a healthy lifestyle and balanced diet, while discouraging the consumption of sugary soft drinks, positively impacting society.

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