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econs1101

March 17, 2018
ECON1101- SUGAR TAX ASSIGNMENT
Student Name: Raaghav Raj
Student Number: 21311181
A)
Market Failure occurs due to an inefficient allocation of resources in a free market
(Finkelstein 2010). One of the reason to market failure is externalities because the
equilibrium cost doesn’t exactly reflect the true benefits and cost of a product
(Veerman et al 2016). Hence a transaction affects individuals not involved (ie, third
party).
From the gratin institute reading we understand that Sweetened sugar drinks (SSB)
were the major cause of obesity and most medical expenses of obesity were covered
by publicly funded health system and social safety nets. This leads to a negative
externality on the society because people who are not consuming are also
contributing for the medical expenses and thus disadvantaged (Duckett & Swerissen
2016).
More over because people have that safety they wouldn’t spend lot of time on taking
care of their own health and wouldn’t understand the full costs of obesity (Duckett &
Swerissen 2016).
Figure 1: Graph representing Market Failure associated with Sugar Sweetened
Beverages due to Negative Consumption Externality.
From the diagram above we can observe that Marginal private benefit (MPB)
is above the Marginal social benefit (MSB). This represents negative
externality in consumption because the individual consumers of the good
seem to be benefited more than the society (Finkelstein 2010). This leads to
deadweight or welfare loss to the society thus there is a market failure as
indicated in the shaded region above.
B)
Figure 2: Graph showing the Revenue received by imposing a tax on Sugar Sweetened
Beverages
Introducing a tax in this case would increase the private cost of consumption and
decreases the quantity demanded for the SSBs which is creating the externality
(Duckett & Swerissen 2016). Imposing a tax on negative consumption externalities
such as in the case of SSBs would force the individual consumers to pay the relatively
full social cost of the good (Finkelstein 2010). Tax shifts the MSC curve to the left and
reduces the demand and output for the good (in the diagram – from Q0P0 to Q1P1).
Huge revenue for the government is raised which can be used to combat the welfare
loss. Revenue earned would be equal to the area (P1 - P2) Q1 (green shaded region).
Without a tax, there would be an overconsumption (Q0P0) because people ignore
the external costs and thus imposing a tax is a positive move from the government

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