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ECON7460 Health Economics | Introduction of Sugar Tax

Several countries around the world have introduced a “sugar-tax” (an additional tax on foods and drinks with a high sugar content) in an attempt to reduce obesity and improve population health.  Using demand and supply curves, discuss how such a tax would be expected to impact on the health of the population.  Why might such a tax improve health? Why might such a tax fail to improve health?

Answer:

Sugar tax is a tax on sugary drinks it is also called a Sugar Sweetened Beverage Tax (I news, 2018). It is introduced by various governments in their economy, the main purpose of introduction of sugar tax is, reduce the consumption of Drinks contains sugar. There are so many sugary drinks available in the market which contains high sugar level. The Demand of sugary drinks with high sugar contain are increasing very rapidly worldwide. The target audience for this type of drinks are kids and adults. From many studies and researches it has been evolved that the intake of sugary drinks are very destructive for human body. Due to the intake of sugary drinks the chances of getting diseases increases because it damages human immune system.

 In 2012, Hungary and France became the first countries to impose sugar tax and target consumption of sugary drinks. France implement an excise duty of 7 eurocents which is around 10 Australian cents per litre on beverages containing artificial sweeteners or added sugar and Hungary applied public health taxes at fluctuating rates on various forms of soft drinks (The economist, 2014).       

In comparison to sugar food, sugar from drink enters into a human body really quickly and that surpluses human pancreas and the liver


which will increase the chances of getting diseases like diabetes and heart problems. A study in 2010 stated that consuming one or two sugar drinks a day may increase a risk of developing diabetes by 26%. Type 2 diabetes is growing as a main health concern in many countries, and the main reason behind it is sugary drinks. In 2015 1.6 million deaths was recorded due to type 2 diabetes (The guardian, 2018). Obesity is also turn out to be a big health concern all over the world because percentage of obese and overweight peoples in every part of world is rising very rapidly. Addition of one sugar sweetened beverage per day to normal diet can increase almost around 15 pounds of weight over a course of one year (Harris, 2018). 

The sugar hit can increases the chances of mood swings. The time sugar drink is been consumed it gives an instant energy to the human body but after sometime, the body start releasing insulin to cope up with the surge in sugar and this process lead to drop in the endurance and energy level and this can be solved only if person taking more sugar. That means consuming more sugar (Huffpost, 2015).     

To control the obesity and improve the health of people many countries introduce a sugar drink tax or soda tax which is designed to reduce the consumption of drink with added sugar. The main aim of sugar tax is to reduce sugar contain in the drinks. The sugar tax levied on manufacturers, it fully depend on manufacturer whether they will pay the amount of tax by their own or they pass it on to the consumers. Drinks which contain 5-8g of sugar per 100ml and those contain more than 8g per 100ml will be charged at variable tax rates. The increase in percentage of tax will make soft drinks more expensive (Dennis and Abby, 2017). 

When the sugar tax is levied on sugar drinks their prices will increase automatically. The following demand and supply curve will show the effect of sugar tax on price and its impact on demand and supply:

The above stated demand and supply curve shows that original price of sugar drink was P1 the Quantity Demand was Q1 and when the price of sugar drink was increased because of sugar tax new or increased price was P2 and at that point the Quantity Demanded was Q2. SMC stands for Social Marginal Cost and PMC stands for Personal Marginal cost. P is for price, Q is for Quantity and D is for Demand.

It can be clear from the demand curve that the consumption of sugar drinks is not really effected by the levy of sugar tax. There is a very slight shift in the demand curve is recorded. Curve has shift from PMC to SMC and the loss area called deadweight welfare loss, that area shows, after the rise in prices of sugar drink the demand will not get much affected. The deadweight welfare area indicates the extra amount of revenue received by the government, which is generated by levy of sugar tax on sugar drinks and that extra tax amount will be used for the welfare of the society and for the social purpose like heath improvement plans and many other plans and polices of the government (Pettinger, 2017).

The slight shift in demand curve is because of the additive behaviour of the consumer. The additive behaviour of consumer is a factor which will not lead the demand curve shift much because the consumers are very much related to the product. And in the case of sugar drinks also this has been noticed that the consumers are so much fond of sugar drink that if the price goes high, they will not stop consuming it.

Sugar drinks are imposing high external cost on the people. And these external costs are the reason behind higher cost imposed on the national health services. The poor health of citizen adversely affects the working and productivity of the people. And this is the main cause which increases the social cost of sugar consumption more than the private cost (Pettinger, 2017).   

Goods which place themselves as addictive goods in the market are known as demerit goods. In context of external cost sugary drinks can be categorised as a demerit good. They are called demerit good, since the general public is not aware about the private cost involve with the sugar consumption but they may be aware about it bad effects on the health, but still they won’t reduce the consumption of sugar because they have become addictive to it (Whiting, 2018). 

There are three main factors behind the slight shift in demand curve or deadweight welfare loss area. First, the lack of information among people, the general people are not aware about the health consequences related to the consumption of sugar drinks and in condition of lack of knowledge or information the consumer consume the sugar drinks. Second the sugary drinks are easily available in the market and main reason is they are available at very cheap price. Third the advertisement, the sugary drinks are advertised by the companies on large scale and the advertisement are very attractive which forces kids and adults to consume soft drink. These are main reasons due to which the consumption of sugar drinks is not reducing (The balance, 2018).    

The average resident of Australia consumes almost around two hundred and thirty eight teaspoons of sugar ever week deprived of realising that how much sugar content is hidden in soft drinks and other processed food, and this is an example of information failure the consumers are not aware about the bad effects of sugar and the amount of sugar contain in the sugar drinks. In Australia the consumption of sugar in form of sugary drinks has increased by 30% in 10 years. This is mainly based on the standard serving size as earlier soft drinks are available in 375 ml pack but now almost all companies are selling there drinks in 600ml bottles (Fessenden, 2018). 

                                                                Figure 2: Consumption before tax levy                                  Figure 3: Consumption after tax levy

(Source: Oxford Economic, 2016)

The above stated graphs show that introduction of sugar tax on soft drinks not only affects the overall value and volume of soft drink sales but also the market share. If the prices of soft drink rise due to levy of sugar tax the demand of customers will shift from soft drinks to other drinks which are less in price. The customers switch from product with high volume of added sugar to drinks on which tax is not levied and drinks which contain less amount of sugar. The stated changes have wider economic impact on manufactures and distributors of the soft drinks, and other who are attached with economic activity (Cormack, 2016). 

The sugar tax is imposed with the main motive of reduce in the consumption of sugar drinks and improve health of people, but due to many reasons the consumption is not reduced and the motive of improving health of people is not attain. Despite increasing awareness about the health risk associate with sugar drinks and extensive promotion of international and national nutritional guiding principle to encourage reduction of sugar consumption, sugar sweetened soft drinks stay popular, mainly among adolescents and children. From point of view of population health reducing in consumption of sugary drinks is highly desirable, the government need to take some important decision (Oxford economic, 2016). 

Sugar tax not really fails, because the tax was doing well and generating revenues for the government it is a failure of the policy that was designed by the authorities. The levying of sugar tax on the sugar drink is not the best policy to reduce the sugar consumption. The most effective strategy will be combining all policy such as education, tax and ban on advertisement. These all can play an effective role in reducing sugar consumption.

References

Cormack, L. (2016) Sugar tax could save 1600 lives, raise $400 million, Australian research shows. [Online] Available from https://www.smh.com.au/business/consumer-affairs/sugar-tax-could-save-1600-lives-raise-400-million-australian-research-shows-20160413-go5mgh.html [Accessed on 17 May 2018].

Dennis, A. and Abby, B.S. (2017) Sugar Price Supports and Taxation: A Public Health Policy [Online] Paradox. Available from https://journals.lww.com/nutritiontodayonline/Fulltext/2017/05000/Sugar_Price_Supports_and_Taxation__A_Public_Health.6.aspx [Accessed on 17 May 2018].

Fessenden, S. (2018) How sugar taxes punish the people. [Online] Available from https://theconversation.com/how-sugar-taxes-punish-the-people-94014 [Accessed on 17 May 2018].

Harris, B. (2018) Will a sugar tax help reduce obesity. [Online] Available from https://www.weforum.org/agenda/2018/03/will-a-sugar-tax-help-reduce-obesity/ [Accessed on 17 May 2018].

Huffpost, (2015) This Is What Sugar Does To Your Brain. [Online] Available from https://www.huffingtonpost.in/entry/sugar-brain-mental-health_n_6904778 [Accessed on 17 May 2018].

I news, (2018) Sugar tax: what is changing about fizzy drinks – and how much will it cost?. [Online] Available from https://inews.co.uk/news/uk/sugar-tax-fizzy-drinks-what-is-changing-about-my-drinks/ [Accessed on 17 May 2018].

Oxford economic, (2016) THE ECONOMIC IMPACT OF THE SOFT DRINKS LEVY THE ECONOMIC IMPACT OF THE SOFT DRINKS LEVY. [Online]Available from https://www.britishsoftdrinks.com/write/MediaUploads/Publications/The_Economic_Impact_of_the_Soft_Drinks_Levy.pdf [Accessed on 17 May 2018].

Pettinger, T. (2017) Sugar tax debate. [Online] Available from https://www.economicshelp.org/blog/14884/economics/sugar-tax-debate/ [Accessed on 17 May 2018].

The balance, (2018) Shift in Demand Curve. [Online] Available from https://www.thebalance.com/shift-in-demand-curve-when-price-doesn-t-matter-3305720 [Accessed on 17 May 2018].

The economist, (2014) Taxing sugary drinks Stopping slurping. [Online] Available from https://www.economist.com/finance-and-economics/2015/11/26/stopping-slurping [Accessed on 17 May 2018].

The guardian, (2018) Health experts support sugar tax as Coalition calls for 'personal responsibility'. [Online] Available from https://www.theguardian.com/australia-news/2018/jan/08/health-experts-support-sugar-tax-as-coalition-calls-for-personal-responsibility [Accessed on 17 May 2018].

Whiting, B. (2018) Demerit Goods: Definition & Examples. [Online] Available from https://study.com/academy/lesson/demerit-goods-definition-examples.html [Accessed on 17 May 2018].


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