The UK government is considering extending the ‘sugar tax’ to milkshakes and lattes.

Proponents argue extending the Soft Drinks Industry Levy (SDIL), usually known as the ‘sugar tax’, would internalise the negative externalities of sugar consumption by incentivising reformulation of sugar content in drinks and reducing healthcare costs tied to obesity. The Treasury claims the current exemption for milk-based drinks is no longer justified, given their minimal calcium benefits. However, critics highlight the regressive nature of such indirect taxation, which disproportionately affects low-income households and adds to inflationary pressures. Industry groups warn it could stifle innovation and impose costs amid existing economic strain, questioning its effectiveness as a tool for behaviour change.

Milkshakes and lattes could be covered by sugar tax - BBC News

1. Explain the market failures that the Soft Drinks Industry Levy aims to correct.

2. Using a diagram, show how an increase in the SDIL could help internalise the negative externality.

3. Discuss the advantages and disadvantages of an increase in the sugar tax in the UK.