The tax is tackling an negative externality. This time the problem is a lack of information leads consumers to value sugary drinks too highly. This then causes obesity and imposes higher costs on the public health system. Therefore sugar is a demerit good in this case.
As the last post was on externalities I'll just draw the diagram and link to and ABC article on the subject. Jamie Oliver, a prime mover in the campaign for the 'sugar tax' has urged Australia to follow suit. They should.
The problem with sugary drinks is that consumers don't consider the full costs of them. There is a lack of information about the negative effects of the sugar in the drinks. We could represent this as an additional external cost, but instead here it is shown as consumers overestimating the private benefits of sugary drinks. Therefore Demand (Marginal Private Benefit) is to the right of Marginal Social Benefit.
Placing a tax on the drinks pushes the supply curve to the left. There is a new equilibrium price (0P2) and lower quantity (0Q2). In this case the socially optimal output is achieved, because exactly the right tax has been applied and the deadweight loss of the externality is completely eliminated.
Note that not all of the tax is paid by consumers. Part of the tax comes out of firms profits. How this is divided between consumer and producer is determined by the elasticities of demand and supply.
VCE students should note how governments deal with externalities (Unit 3, outcome 1). IB students will need to understand the way markets fail in the technical way the diagram shows it and is an excellent example of tackling demerit goods.
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