ECONOMICS COMMENTARY NUMBER ONE

Title of the extract: Doctors Would Welcome 20%

Sugar Drink Tax

Source of the extract: The Australian

Date of the extract: 22 June 2016

Date the commentary was 15 August 2016

written:

Word count: 747 words

Sections of the syllabus to which Section 1: Microeconomics

the commentary relates:

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Article
Doctors would welcome 20% sugar drink tax
A Greens proposal for a 20 per cent "sugar tax" on soft drinks and fruit juices has been
welcomed by health authorities who say it's a step forward in tackling Australia's obesity crisis.

Health groups say the nation’s children are getting fatter and will die younger and a sugar tax
could raise funds for a plan to trim down the problem.

But the proposal announced on Wednesday has been rejected by the Turnbull government,
while the Labor party has refused to give its support.

Greens leader Richard Di Natale says with one in three children classified as obese, life
expectancy for the next generation will go backwards.

"When it comes to sugary drinks, that is a major contributor to the obesity crisis that we have,"
he told reporters in Sydney at the Obesity Australia summit.

"We know that a small increase in the price of these drinks will decrease consumption and
reduce the incidence of diabetes, heart disease and strokes."

Senator Di Natale said the tax would also give drink companies an incentive to reduce the
amount of sugar in their products.

Sugary drink taxes have been introduced in several countries including the United Kingdom and
France.

Academic research quoted by the Greens shows a 20 per cent sugary drink tax would save
1600 lives and the health system up to $609 million over twenty years.

A recent study found 30 per cent of added sugar consumed by Australians comes from sugary
drinks, and modelling suggests a tax would reduce this by 12 per cent.

The National Heart Foundation said Australia needed a policy that was a "game changer" to
address obesity and called on all political parties to step up.

Australian Medical Association president Michael Gannon said sugary drinks are part of the
growing obesity problem, the number one health epidemic facing the country.

The World Health Organisation has recommended sugary drink taxes and celebrity chef Jamie
Oliver has campaigned for Australia to introduce the measure.

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Finance Minister Mathias Cormann has rejected the concept outright.

Labor frontbencher Katy Gallagher said a range of interventions was needed and a sugar tax
was not Labor policy at this point, she told reporters.

The Australasian Association of Convenience Stores has also spoken out against the proposal.

"An educational, not emotional, approach is the only way to achieve better health outcomes,"
the group said in a statement.

Citation
"Doctors Would Welcome 20% Sugar Drink Tax." The Australian. N.p., 22 June 2016. Web. 29
July 2016. <http://www.theaustralian.com.au/news/latest-news/greens-call-for-sugar-drink-
tax/news-story/69f454fe83791356ce485bb6b52bfb68>.

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Commentary

This article analyses the proposal for a tax on sugary drinks in Australia.

An excise tax is a levy placed on certain goods/ services, such that they become more

expensive for producers to supply them, and for consumers to purchase them. The

Green Party would like the Government to impose a tax, in order to discourage the

consumption of it.

Health experts support the implementation of a 20% tax on soft drinks and

fruit juices, in hopes of “tackling Australia’s obesity crisis”. Consuming sugary drinks

produces negative externalities, which are the harmful effects inflicted upon third parties

when the good is consumed. In this case, the main negative externality of consumption

is the amount of money the health industry spends on these consumers, which can

accumulate "up to $609 million over twenty years”.

Diagram 1

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 As illustrated in Diagram 1, the socially optimum output is at P*,Q*, where

Marginal Social Benefits (MSB) = Marginal Social Costs (MSC). However, since

consumers aim to maximize their private benefits, they would consume at P1,Q1, where

Marginal Private Benefits (MPB) = MSC, ignoring the negative externalities produced.

This results in market failure, as there is an over-consumption of sugary drinks (Q*–Q1).

Hence, government intervention is needed, such as taxation.

Nevertheless, political parties had rejected the Greens’ proposal, claiming

that although intervention was needed, a “sugar tax was not Labor policy at this point”.

Diagram 2

The effect of implementing the sugar tax is illustrated in Diagram 2. As it

is a percentage tax (ad valorem), the value of tax increases as the price rises, hence S1

and Stax diverges. The original equilibrium is Pe,Qe. However, when the tax is imposed,

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producers will only be willing and able to supply Q# at the same price. Consequently,

there is excess demand. Market forces will lead to an extension along the supply curve

(yàz) and a contraction along demand curve (xàz), forming the new equilibrium z at a

higher price (Ptax) and lower quantity (Qtax) than the original equilibrium. Producers and

consumers will now have to spend more than before to supply/ consume the same

product.

Because of this, consumers will now be less willing and able to purchase

sugary beverages, ergo quantity demanded will decrease; hence, “the incidence of

diabetes, heart disease and strokes” will reduce. A mere 20% tax can potentially

reduce Australians’ consumption of added sugar by 12%, therefore taxation would be

quite an effective solution. Furthermore, it can generate a significant amount of tax

revenue for the government, which could then be spent on educating the public about

the harmful consequences of over-consuming sugar, or subsidizing non-sugary drinks,

to discourage the consumption of sugary beverages.

Although a sugar tax could greatly benefit the citizens of Australia, it might

introduce more problems to society. The over-consumption of sugar is, mostly, a private

cost to the consumer. It is one’s own choice to consume it, despite knowing the health

consequences of doing so. Thus, if the government taxes sugary drinks, they are

essentially restricting the consumers’ freedom of choice, regardless of their good

intentions – after all, it could be that consumers knowingly disregard the health

consequences; hence a sugar tax restricts their freedom.

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 Additionally, some firms may go out of business, because of the tax.

Higher prices would decrease the quantity demanded for sugary drinks (Diagram 2:

QeàQtax), so some firms in the industry may not earn as much profits as before; thus,

entrepreneurs may no longer want to produce these goods, so firms may shut down.

This affects the economy and is likely to increase unemployment rates.

Nevertheless, instead of shutting down, some firms may treat the tax as

“an incentive to reduce the amount of sugar in their products”, thus evading the sugar

tax, and are able to continue production. However, the quantity demanded might

decrease, as consumers tend to be more willing to spend slightly more money to buy

sweet drinks than lite versions that do not taste the same. On the other hand,

production costs would be reduced because less sugar would be used. This might make

up for the loss in revenue from a lower quantity demanded, but only to a small extent;

the reduced production costs is likely to be insignificant, since sugar is a relatively

cheap resource.

In conclusion, although a 20% sugar tax could be beneficial to the health

of Australian citizens, it might bring up issues concerning the consumers’ freedom of

choice and firms’ production activities – this could be one of the reasons why certain

political parties have debated against the proposal.

Lost marks from evaluation (13/14 marks)

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