Should there be a 'sugar tax'?

There is discussion around the world about putting a tax on sugar. In particular the sugar in fizzy drinks is causing concern with young people consuming so much sugar that it is leading to an obesity problem.

When people become overweight they are more susceptible to illness, such as heart disease. This leads to higher medical costs which are, in most countries, placed on governments and also leads to lower productivity. The economic problem is one of negative externalities in consumption.

The diagram below shows how negative externalities lead to a market failure in the consumption of sugar.

The demand curve (D) is also the Marginal Private Benefit Curve (MPB). The market equates supply and demand at P1, Q1. The problem is that households do not consider all of the costs of consuming all that sugar in the fizzy drinks. The Marginal Social Benefit of consuming sugar is less than the perceived private benefits.

This makes sugar a 'lack of information good' and the market oversupplies the good above the optimum amount (where MSC = MSB which defines allocative efficiency) by the amount Q1 - Q*.

So will the proposal to impose a tax on sugar work? The answer is that if the tax is of the right amount it will. In the diagram a tax of P* - P2 is imposed and the equilibrium quantity falls to the social optimum 0Q*.

There are difficulties. The BBC article suggests that is there is a 20% tax on fizzy drinks will reduce sugar consumption by 16%. That suggests demand is really quite inelastic. If the tax was on all sugar then it would be more effective. Another difficulty is that we actually don't know what the optimal consumption of sugar is, or the elasticity of demand, so the 'right' tax level is guess work.

A tax on sugar will reduce consumption, it will internalize the externality due to the information failure and provide revenue to help fund health services for those who need them. For economists it's a good solution.

The Age has an article here

The BBC have a story on  a UK proposal here

This article is aimed at a level of difficulty that is most suited to IB Economics (and A level). However VCE students need not worry about the labels MPB and MSC,  simply that the demand curve does not include the true benefits of consuming the good.