Will the Sugar Tax work?

After many months of debate, the sugar tax was finally brought into action in the UK earlier this month. A sugar tax is a form of surcharge introduced to reduce the overall consumption of sugary drinks within a country. The tax is an example of a pigouvian taxation, which is designed to discourage unhealthy diets.

A study conducted in 2010 showed that consuming one or two sugary drinks a day gives you an increased risk to developing diabetes by 26% (according to a Wikipedia article on sugar tax). With type II diabetes becoming a growing health concern in both MEDCs and LEDCs, governments are beginning to realise the negative effects caused by consuming excess sugar. For this reason, a sugar tax is being introduced to combat the negative effects of sugar consumption on the UK economy.

But what exactly are these negative effects and will a sugar tax have a big enough impact to prevent them?

The main problem caused by the consumption of sugar can be linked to the negative externalities that arise from this particular market. A negative externality is a cost suffered by a third party as a result of an economic transaction. The consumption of sugar causes health problems, which consequently leads to a fall in productivity and an increase in costs for the public health sector. The marginal social benefits of sugar consumption are lower than the marginal private benefits. The socially optimal level of sugary drinks consumption is where social marginal costs equal social marginal benefits.

This sugar tax is a form of government intervention in order to minimise the problems caused by negative externalities.  By introducing a sugar tax, sugary drink manufacturers are forced to increase their costs, which would consequently lead to them having to increase the price of their products. This rise in price could potentially reduce the demand for sugary drinks as price and demand have an inverse relationship. However, this depends upon how price elastic the sugary drink products are.

Personally, I believe that the demand for sugary drinks would be fairly elastic as the good is not a necessity so most consumers would be put off by increases in price. However, this depends on the brand of drink and the consumer behaviour. If some consumers purchase sugary drinks on a regular basis then a slight increase in price may not have much of an effect on their buying habits. Furthermore, brands that control the sugary drinks market like Coca Cola and PepsiCo are able to increase the price of their goods without affecting quantity demanded too much. 

The sugar tax will be an effective way in reducing the external costs from sugar consumption as the rise in price of sugary drinks (due to the tax) will cause customers to reduce the amount they purchase and when this happens on a large scale in the country, the overall sugar consumption will decrease. This will therefore reduce the number of people under risk of sugar-related illnesses like diabetes, which therefore reduces the demand for health services.

On top of this, the introduction of a sugar tax will raise tax revenue. It is estimated that a 20% sugar tax could potentially generate approximately £1 billion. The government can use the money raised from the tax to fund spending towards preventing growing health problems. For example clinics specifically targeted for diabetes patients and national campaigns to educate people on the dangers to health caused by sugar.

For these reasons, I am convinced that the introduction of the sugar tax is a smart move by the government as it will certainly have an impact on the demand of sugary drinks. However,  this is an ongoing process and the government must continue to intervene into this market to further minimise the risk of sugar-related diseases within the UK.