What is the effect of the imposition of a tax on high-sugar drinks in the UK?

British market for high - sugar soft drinks represents a market failure. The drinks are a demerit good and are over - consumed (Figure 1 to draw: the graph showing supply and demand curves denoted as S and D). The equilibrium level of output is reached where supply and demand curves cross, which is at the level of output Q and price level P. To decrease the quantity of consumed high - sugar drinks, the government imposes a specific tax on them. (Figure 2 to draw: the graph showing original supply and demand curves, as well as the new supply curve (S+tax)). As a result, costs to producers rise, which, on the other hand, results in the decrease of supplied quantity of the product at all price levels. The supply curve shifts vertically upwards by the amount of the tax (as on the second graph). Producers are willing to raise the price to P + tax and pass the whole tax on consumers. However, at this price level there is excess supply. The price falls until new equilibrium is reached at price level P2, at the level of output Q3, which is lower than the original level of output Q. 
The effect for different stakeholders shall be analyzed. The UK government now receives tax revenue P2PYX. Consumers pay a higher price: P2 instead of P. Their tax burden is PP2 per unit (e.g. 1l) and they consume quantity Q3 instead of Q. They may start shopping abroad to avoid tax burden. Tax burden on producers is PP2 per 1l. Their revenue will be fall. The market falls in size from the one producing Q to Q3. Producers now produce a smaller quantity, so they may start employing fewer people - the level of unemployment is likely to rise.

Answered by Sara K. Economics tutor

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