The Government’s planned sugar tax is set to have the greatest benefit on children, the largest consumers of soft drinks. The tax will add 18 to 24p to the price of 1 litre of sugary drinks, if the full cost is passed on to consumers. This equates to an extra 6p for a can of Fanta and 8p for a can of Coca Cola. Currently there are 15 million obese children and adults in the UK. Research suggests that raising the price of sugary soft drinks will cut this number by 140,000, as well as leading to 269, 000 fewer cases of tooth decay and 19,000 fewer cases of Type 2 Diabetes. It is also predicted to raise £520 million of tax revenue in the first year.
However, whilst the impact can be seen as significant, many analysts argue that it is quite modest. Evidence suggests that the tax could reduce sugar intake by 5kcal per person per day, the equivalent of the energy needed for a 1 minute brisk walk. It will be necessary to look at overall lifestyle and diet if we are to solve the growing obesity crisis, especially given that sugar comes from a range of sources such as the consumption of confectionary. One study found that consuming non sugary drinks actually leads to increased consumption of other foodstuffs, as people make up for the lost energy.
In addition soft drinks firms argue that there is no evidence the tax will cut obesity. Research suggests that up to 4,000 jobs could be lost as a result of the tax, assuming no change is made to soft drink formulas and the full levy is passed on to the consumer. Analysis suggests that the increased price of soft drinks could lead to a 0.4% fall in the number of soft drinks sold. As 364,518 jobs depend on making and selling soft drinks, this could lead to a 1.2% fall in employment. However, firms are planning to cut 20% of the calories in soft drinks by 2020, in order to avoid having to pay the levy.
Economics Questions
- Explain why the Government is planning to introduce a tax on sugary drinks. (4 marks)
2. Using a diagram, analyse the impact of the sugar tax on the soft drink industry. (6 marks)
Suggested structure
- Draw an appropriate diagram
- State a possible impact referring to the diagram
- Explain why the tax should have this impact referring to economic theory
3. Discuss the likely impact of a tax on sugary drinks. (15 marks)
Suggested structure
- Introduction – Briefly define a tax
- State one possible impact of the tax
- Use evidence from the extract/own knowledge to support
- Explain why this is impact is likely linking to economic theory/diagrams
- Explain why this impact might not be likely. What does it depend on?
- State a second possible impact of the tax
- Use evidence from the extract/own knowledge to support
- Explain why this is impact is likely linking to economic theory/diagrams
- Explain why this impact might not be likely. What does it depend on?
- Conclusion – Overall which impact is most likely? Is there a difference between short versus long term? Who does the tax impact most, consumers or producers?
4. Evaluate the possible microeconomic and macroeconomic impacts of a tax on sugary drinks. (20)
Suggested structure
- State a possible positive microeconomic impact
- Use evidence from the extract to support
- Explain why this impact is likely referring to economic theory/evidence
- Explain why this impact may not always be likely. What does it depend on? When might this effect not occur?
- State a possible negative microeconomic impact
- Use evidence from the extract to support
- Explain why this impact is likely referring to economic theory/evidence
- Explain why this impact may not always be likely. What does it depend on? When might this effect not occur?
- State a possible positive macroeconomic impact
- Use evidence from the extract to support
- Explain why this impact is likely referring to economic theory/evidence
- Explain why this impact may not always be likely. What does it depend on? When might this effect not occur?
- State a possible negative macroeconomic impact
- Use evidence from the extract to support
- Explain why this impact is likely referring to economic theory/evidence
- Explain why this impact may not always be likely. What does it depend on? When might this effect not occur?
- Conclusion – Overall what is the most likely impact? Is it generally going to be positive or negative? Is there a difference between short term vs long term effects? Is it the same for all stakeholders? Does it have more micro or macro impacts?
Mark Scheme
Economics Questions
- Explain why the Government is planning to introduce a tax on sugary drinks. (4 marks)
- One reason for introducing a tax is to correct the market failure in the soft drinks market (1). Around 15 million adults and children in the UK are obese (1). This suggests that there is currently overconsumption of sugary drinks in the UK (1). This has led to negative externalities such as increased NHS costs and higher absenteeism from work (1).
2. Using a diagram, analyse the impact of the sugar tax on the soft drink industry. (6 marks)
- Up to 3 marks for the diagram; 1 mark for correct labels, 1 mark for showing negative externality, 1 mark for showing MSC + tax
- A tax on sugary drinks increases costs of production for firms, which shifts supply to the left (1). If this is passed on to consumers it will increase the price of sugary drinks (1). This should reduce consumption of sugary drinks from the free market equilibrium to the socially optimum point. (1).
- Discuss the likely impact of a tax on sugary drinks. (15 marks)
- Possible impacts
- Reduces negative externalities if consumption of soft drinks falls by 0.4%
- Reduces costs to NHS as less obesity/diabetes/tooth decay
- Increased productivity as absenteeism falls due to fewer health problems
- Raises tax revenue for the Government (£520 million) which could be used elsewhere e.g. education/healthcare
- Structural unemployment, 4,000 job losses in the industry
- Soft drinks firms may reduce the sugar content in products to avoid the tax
- Possible Counterbalance:
- Depends on the PED, if it’s inelastic consumption will remain relatively unchanged even if the tax
- Depends whether firms pass the tax on to consumers
- 4% reduction in consumption is very low therefore may not have an impact
- Consumers may get their sugar intake elsewhere e.g. confectionary so has little impact on obesity
- The reduction in sugar is only equal to 5kcal so quite a modest impact
- Job losses are less likely if firms decide to alter recipes to contain less sugar
4. Evaluate the possible microeconomic and macroeconomic impacts of a tax on sugary drinks. (20)
- Possible microeconomic effects:
- Sugar tax increases a firms costs of production, leading to either increase price or reduced profits
- Increased price of soft drinks may reduce demand
- Reduced revenues and profits for firms as a result of the decrease in demand
- Reduces negative externalities as less obesity/health issues
- Corrects market failure through the use of the price mechanism
- Increased demand for non-sugary alternatives
- Encourages innovation and dynamic efficiency
- Possible counterbalance:
- Depends on the PED as if its inelastic relatively small impact on demand
- PED may be inelastic as sugary drinks could be seen as addictive
- PED may be elastic as lots of alternatives exist
- Firms may decide to absorb tax especially if PED is elastic therefore little impact on price and demand
- Depends on the size of the tax as to whether the negative externality is reduced
- Consumers don’t always behave rationally therefore may continue to consume soft drinks
- Possible macroeconomic effects:
- Increased Government tax revenue, £520 million in first year
- Structural unemployment due to 4,000 job losses
- Reduction in GDP as less consumption
- May lead to inequality as lower incomes are impacted more by the tax
- Regressive tax as not proportional to people’s incomes
- Possible counterbalance:
- If consumption of soft drinks falls significantly the tax revenue will be lower
- Job losses will be minimal if firms change the formula for the drinks to contain less sugar
- GDP will not really be affected if consumption doesn’t change
- If firms alter sugar content relatively little impact on GDP
- In the short run there will be little impact as it takes time for consumption habits to change
Credit: Lucy Temple.
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