Evaluate the impact of the introduction of a sugar tax on fizzy drinks in the UK.

This question tests the knowledge of students on indirect taxes, demerit goods, negative externalities and market failure. It is an example of a longer answer question, where students would be expected to consider both sides of an argument and implement chains of reasoning. It is also important to note that this question asks about an introduction of a tax, rather than a raise or reduction. Therefore, they should begin their answer by including a diagram showing the impact of an indirect tax on prices and quantity consumed. In support of an introduction of a sugar tax, it is important to begin with basic concepts that can apply to all forms of tax policy. Implementing a tax will obviously raise government revenue. This can be ring-fenced and used to fund public health projects, such as primary school sport activities. Aside from this, the real root of the question comes from the risks associated with addressing market failure through government intervention. A tax on sugary drinks is an attempt to tackle the obesity crisis faced by the UK. A high-scoring student might have learned some statistics to include in their answer to this highly topical question. There are negative externalities for third parties as a result of overconsumption of these drinks, resulting in a reduction of social welfare. For example, additional pressure on the NHS due to increased rates of diabetes and tooth decay has implications for individuals outside of the direct market transaction. The government may be forced to increase taxes to deal with the strain on health resources, and waiting times for hospital beds may increase. To reduce these external costs, a tax on sugary drinks would hope to nudge consumers to change their behaviour by providing incentives to reduce consumption. In this way, the negative externalities would be mitigated. It would be important for students to include a negative externalities diagram in their answer. A tax such as this would also tackle the information failure contributing to this market failure. Many consumers may be unaware of the impact of their consumption decisions for their health. A tax will force them to consider the private costs and benefits and hopefully prompt attitudinal changes via a herd mentality. In terms of producer behaviour, it creates a direct incentive for producers to reduce the sugar content of their products which will overwhelmingly benefit the health of the nation. Evaluating the introduction of such a tax, one must consider whether the tax would be effective and equitable. The efficacy of the tax depends on the elasticity of demand for sugary drinks. This can be evaluated using traditional demand and supply diagrams to compare the tax burden for consumers versus producers for different elasticities. Elasticity of demand essentially explains which group will be more sensitive to price changes. It would be hoped that a sugar tax would be felt most severely by consumers in order to produce a change of consumption behaviour. Other evaluation methods could focus on the regressive nature of the tax, as it will disproportionately impact lower income households who spend a larger proportion of their income on sugary drinks. In terms of practically implementing the tax, the cost of administration might be high and as with any tax, there is the potential for tax evasion on a large scale. A more macroeconomic impact would be the direct loss of jobs in the drinks industry, as well as the indirect employment effect across the supply chain for retailers and suppliers. The impact of the tax may be negligible because the rational consumer will simply shift the source of their daily sugar intake from drinks to chocolate bars, for example. The decision to solely tax sugary drinks seems arbitrary, when there are many other equally as harmful food products available. Therefore, a student answering this question might advocate that the government should not exclusively rely on taxation, but instead should combine their policy with regulation and informational campaigns as well.