With objective of the tax. As seen in

With Ireland just announcing a tax on sugary drinks, Canadian consumer health groups such as the Canadian Cancer Society, are determined to implement a sugary drink tax to prevent childhood obesity. But, many Canadians are not supportive of a levy on a sugar tax as they believe that it’s not efficient. Many argue that it’s not effective to just tax soda or that the increased prices on these drinks disproportionately affect the poor. With all these different perspectives from the article, the real question is, to what extent will the sugar tax eliminate market failure? The consumption of sugary drinks is a negative externality of consumption meaning it has a negative side effect of consumption on society. When it’s consumed, it provides more cost for society than it benefits the consumer because drinking soda and leading an unhealthy lifestyle will result in becoming an unproductive member of society. Also, their healthcare treatment would be a burden on taxpayer money. The price elasticity of demand (PED), which measures how much the quantity demanded of a product changes when there is a change in price of the product, must be elastic for the sugar tax to be efficient. The increased price of the drinks would lead to a greater than proportionate change in the quantity demanded, which is the whole objective of the tax. As seen in the graph below, the demand for sugary drinks is elastic. The producers feel a greater effect from the indirect tax than the consumers since they try to take much of the burden so that they don’t lose customers. ┬áBecause of the indirect tax and the fact that sugary drinks are elastic, the producer takes majority of the burden from the sugar tax to not lose customers. This is difficult since even a small increase in price, discourages consumption of the good. Also, since these drinks aren’t necessary goods, the quantity demanded decreases greatly. Although the greater producer burden may make it harder to decrease quantity demanded of the elastic good, the consumer burden does reduce it. Also, there is a significant welfare loss that neither the consumers nor the producers receive but, this surplus is not important because the tax is implemented to reduce the quantity demanded of sugary drinks, not earn revenue. ┬áSociety’s consumption of sugary drinks would be considered as a negative externality of consumption because it has a negative side effect of consumption on society. ┬áTherefore, the consumption of sugary drinks creates external costs to society. Shown on this graph, the marginal private benefit is above marginal social benefit because the consumer would receive more benefit from the good than society. Whether the tax is implemented or not, a certain number of consumers will always have some incentive to buy sugary drinks. The indirect sugar tax is effective in reducing the quantity demanded for sugary drinks but it is not entirely efficient because the externality is not eliminated. This is because, the price of taxed sugary drinks may still be cheaper than healthier drink options. Despite the tax being effective, the economic theory states that the market failure must be entirely fixed. The equilibrium is still not at the socially optimal points even after the tax is implemented and much of the externality still exists. There are more efficient ways to reduce sugar intake in addition to implementing a sugar tax to decrease demand for soda. The article states that a tax on sugary drinks could raise $43.6 billion over 25 years. This revenue can easily be used to reduce sugar intake. One way is to use the surplus from the sugar tax to subsidize healthy drink options. Soda is cheap so, the increased prices on these drinks disproportionately affect the poor. Subsidizing healthier drinks would reduce the demand for sugary drinks. The price of soda can continue to increase but the price of healthy options will need to decrease. It has the potential to eliminate the externality and eliminate the market failure as healthy drinks will be more appealing. To conclude, an indirect tax on sugary drinks will bring us closer to leading a healthy lifestyle. But, is it the best option? It does not entirely eliminate the externality but the market failure can be fixed if additional solutions are implemented as well. The best option is to use the sugar tax in addition to using the revenue from the tax to subsidize healthy drinks. The sugar tax is only the first step to becoming a healthier community.