Introduction:

The Soft Drinks Industry Levy, originally announced in the 2016 Budget, was implemented in April
2018 as a response to concerns about rising childhood and teenage obesity. 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 United Kingdom. The new tax
was introduced in April 2018 in the United Kingdom, and was applied to soft drinks which
contain added sugar and have total sugar content above certain thresholds.

The tax on soft drinks, commonly referred to as the ‘Sugar Tax’, has
already resulted in over 50% of manufacturers reducing the sugar
content of drinks since it was announced in March 2016 – the
equivalent of 45 million kg of sugar every year. Soft drinks
manufacturers who don’t reformulate will pay the levy, which is
expected to raise £240 million each year.  The aim of the Soft Drinks
Industry Levy is to encourage companies to reformulate their soft
drinks. Since the levy was announced two years ago, the expected
amount of revenue has gone down from £520m in Year 1 to £240m.
Even before coming into effect, the levy is already working – over
50% of manufacturers have reformulated their drinks
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[ CITATION All12 \l 1033 ]. 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 [ CITATION Tej10 \l
1033 ]. 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. [ CITATION DRT15 \l 1033 ]. 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.[ CITATION
DrW15 \l 1033 ]. 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.

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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[ CITATION Sar16 \l 1033 ]. 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[ CITATION Dav161 \l 1033 ].

The problems and benefits of such a Tax:

In England alone, a third of children are obese or overweight when
they leave primary school, and evidence shows that 80% of kids who
are obese in their early teens will go on to be obese adults.

Teenagers in UK consume nearly a bathtub of sugary drinks each

year on average, fuelling a worrying obesity trend in this country. The
Soft Drinks Industry Levy is ground-breaking policy that will help to
reduce sugar intake, whilst funding sports programmes and nutritious
breakfast clubs for children

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There are associated problems for imposing a sugar tax. These are assigning the right amount
of taxation that will internalise the negative externality[ CITATION Hub13 \l 1033 ]. 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.

In England, the new levy revenue will be invested in giving school-aged children a
“brighter and healthier future”, including programmes to encourage physical activity
and balanced diets. For Scotland, Wales and Northern Ireland, the Barnett formula
will be applied to spending on these new initiatives in the normal way. As with
alcohol and tobacco, imports of these type of products will always present risk of
duty evasion. Currently there is a lack of clear policy on compliance and how levy
collection on importers will be enforced.

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[ CITATION Col16 \l 1033 ].

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[ CITATION All12 \l 1033 ]. 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

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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.

A key consideration in the impact of such taxes is how consumers and firms will respond to
the tax. For example, if consumers stop buying sugary drinks and consume water instead the
tax could be relatively effective. On the other hand, if they switch to milkshakes (which are
not taxed under the Soft Drinks Industry Levy), the reduction in sugar consumption could be
less than intended. The effect of the tax will also depend on how much firms pass the tax on
to consumers through price increases, as well as whether they reformulate products with
reduced sugar content in order to avoid the tax. Some drink manufacturers have already done
this prior to introduction of the new levy.

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