Answer to Question #202541 in Macroeconomics for SAQIB

Question

In 2018, the UK Government will impose a new tax on sugary drinks, aimed at tackling obesity.

Behavioral economists believe that taxation alone is unlikely to be very effective in reducing

consumption. By 2050, obesity is predicted to affect 60% of adult men, 50% of adult women and

25% of children. It is associated with a range of health problems including type 2 diabetes,

cardiovascular disease and cancer.

 

Required:

1.         Explain why, in a free market, sugary drinks may be over consumed. (5 marks)            

 

2.         Evaluate the view that imposing a tax is the most effective government policy for reducing the market failures arising from overconsumption of unhealthy food and drink.

Answer 1

1.

In a free market sugary drinks are very popular, the producers spend a lot of money on advertising, they are widely used in fast-food industry, and they cause some kind of addiction, that's why sugary drinks may be over consumed.

2.

A sugar tax will internalize negative externalities by shifting quantity demanded back to a quantity where the Social Marginal Cost (SMC)= Social Marginal Benefit (SMB), making the market socially efficient.