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Practice exam questions

Sugar Tax (Student Essay)

  • Levels: AS, A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

Here is a great example of a Year 12 student essay written on the sugar tax in the UK.

The question was: "A tax on the producers of high sugar drinks is justified as a means of tackling chronic health problems in the UK. Discuss the validity of this view."

The benefits of a tax on sugar in the UK is defined first and foremost by its effectiveness in reducing problems associated with high sugar consumption, and then by the ancillary benefits that come with such a tax. Although concerns about the risk of job loss and the regressive nature of the tax are also valid, the size of the problem of obesity and diabetes, and the fact that there will be a net welfare gain justifies both these counter arguments and therefore the tax itself. However, if the ultimate aim is to greatly reduce sugar related diseases, a behavioural deterrent should also be used in conjunction with a tax.

The first justification of a tax on high sugar drinks is the fact that there are external costs not often considered by consumers. Rational choice theory states that consumers are largely concerned with the Private Marginal Cost (PMC) and not with the Social Marginal Cost (SMC). The main external cost of sugar concerns healthcare services. Indeed, the NHS has states around £16 billion a year is spent on the ‘direct medical costs’ of diabetes and obesity related conditions, more than government spending on police and fire services. In this case, the SMC is larger than the Social Marginal Benefit (SMB) at Q1 and there is a deadweight welfare loss of area x as the SMC is larger than the SMB (see fig. 1). Instead, a sugar tax could internalise the negative externalities by pushing quantity demanded back to Q2 where the SMC=SMB, making the market socially efficient. Despite this, an estimated £400 million a year[1] is to be raised from the tax, estimated down from £1 billion due to company reformulation. When a similar tax was imposed on salt in 2001 the NHS was saved £1.5 billion. These extra cost cuts could be used to prevent market failure, thus justifying the tax[2].

[1] According to the Office for Budget Responsibility.

[2] This occurs when the competitive outcome of markets is not efficient when concerning the whole economy (in this case the NHS).

Indeed, another benefit of a proposed sugar tax is companies will be encouraged to reformulate drinks due to the increased costs (see fig. 2). Indeed, Irn-Bru has reformulated their drink to halve the content of sugar, as well as companies such as Sprite and Fanta. This is crucial to the success of the tax, as there is a viable health problem in the UK. Intake from 11-18 year olds amounts to 74.3g per day, or 15.6% of their daily food energy consumption[1]. Public Health England recommends sugar should amount to only 5% of their daily energy intake, a figure which was endorsed by the Scientific Advisory Committee on Nutrition (SACN).

A sugar tax further counteracts the fact that sugar is a demerit good. That is to say people are unaware of the personal costs of consuming it, or struggle to stop due to sugar’s addictive qualities. Indeed, the British Journal of Sports Medicine has stated that as sugar leads to mood swings[2], consumers seek out more to counteract the tiring effect that ensues. This could be counteracted by a tax on sugar, as many consumers simply would not be able to satisfy this ‘sugar cycle’. Furthermore, consumers currently make irrational decisions when buying sugary drinks due to the lack of information, a key feature of a rational decision. The World Health Organisation concluded that many sugars consumed are ‘hidden sugars’ as the actual quantity of sugar is not made clear enough due to them being disguised as ‘sweeteners’. They cited that a can of sugar-sweetened soft drink could contain up to 40g, or around10 tablespoons of ‘free sugars’[3]. A tax of 18p a litre for drinks with 5 grams of sugar per 100ml would expose this information failure in the form of a price increase, again justifying the tax.

[1] Figures from Public Health England

[2] Consumers experience a ‘high’ shortly after intake, then a long period of tiredness afterwards/

[3] These are sugars manufacturers add to drinks to sweeten them.

A popular argument against a proposed sugar tax is that it is regressive, meaning it disproportionately effects low income families. Indeed, as lower income families spend a higher proportion of their income on foodstuffs and beverages a tax will disproportionately affect them. However, the fact that the problem of obesity is greater among low-income families, and that this increased elasticity of demand means that they will be easier put of these products justifies this regressiveness. Concerning the first argument, findings from the Millennium Cohort study stated that by the age of 11, 7.9% of the poorest fifth in the UK are obese, compared to 2.9% of the richest fifth, but also that lower income families, had a higher elasticity of demand[1]. Not only that tax on sugar but also sugar itself is regressive, justifying the tax. Concerning the second argument, greater elasticity of demand means a tax on sugar will cause a greater decrease in consumption if these families had inelastic demand (see fig. 3). As the problem of obesity is disproportionately bigger among low-income families, a disproportionately bigger measure to counteract this problem is valid. The fact that sugary drinks have a relatively elastic demand in general also justifies the tax for the aforementioned reason.

[1] A study done by M.A Colchero and J.C Salgado concluded that on average the price elasticity for soft drink was 1.06-1.16, meaning a 10% increase in price would result in an 11.6% decrease in consumption. They also concluded PED was higher among low-income families.

Perhaps the most prevalent argument against a sugar tax is that there are other solutions that are more effective than a tax. Public Health England (PHE) concluded that consumers are heavily influenced by marketing, in particular end of aisle displays leads to a 50% increase in purchases of sugary drinks. This marketing is also disproportionately common in the UK compared to Europe, as food promotion accounts for around 40% of all domestic food and drink spending by corporates. PHE estimates that sugar consumption is increased by 6% due to this. This is ample evidence to suggest that behavioural nudges could be used to dissuade customers from buying sugary drinks, as any decrease in quantity demanded of sugar due to a tax will be both short term and offset later by the continued high spending on advertisements.

However, the question of government intervention and regulation goes hand in hand with these behavioural changes. Indeed, a case study often cited is in Philadelphia where, with no sugar tax law, the drop in sugar consumption is the ‘single largest change in the American diet in the last decade’[1]. However, this was achieved through strict menu labelling laws and laws on the amount available for supply, as well as a commitment by the beverage industry to cut sugar consumption nationwide by 20% by 2025, a commitment not made by the industry in the UK. Therefore, although more extreme measures of state intervention may not be politically possible[2], a simple behavioural change, such as aisle placements, hand in hand with a tax on sugar, would greatly reduce sugar consumption, validating the tax.

Another concern is that a tax would simply be ineffective as only a small part of the tax would be passed on to consumers through higher prices, rather than the producer reformulating due to paying the majority of the tax. Indeed, a study by the National Bureau of Economic Research critiqued the sugar tax citing sugar tax imposed in Berkeley, California, where 22% of the tax was passed on to consumers, who therefore did not consumer notably less drinks. Indeed, the nature of an indirect tax, especially one with elastic demand, is that the majority of the tax is paid by producers (see fig. 4). However, the study acknowledged that the area seemed to be an anomaly where drinks were relatively inelastic (partially due to the richer demographic).

Furthermore, there are advantages of producers absorbing a larger portion of the tax burden specifically in the UK, where the majority of beverage manufacturers have reformulated to avoid paying the tax[3], a positive outcome. The only major brand not to is Coca-Cola, who have increased prices of its signature drink by 20p to £1.99 and downsized their bottles, which may result in reduced sales due to its high price elasticity[4], again a positive outcome due to a sugar tax. Although the producer has the ability to pass on a portion of the tax burden to the consumer, this could be disadvantageous for the company itself. These reasons therefore justify a tax on sugar, as companies reformulating their drinks or consumers being dissuaded by higher prices are both effective in reducing national sugar intake[5].

[1] According to the New York Times.

[2] The Conservative government has been committed to a policy de-regulation in the last 7 years.

[3] Such as the aforementioned Irn-Bru, Sprite, Fanta

[4] Caused by the presence of a popular substitute, Pepsi, a company which has agreed to re-formulate.

[5] As well as the previously mentioned evidence, The Office for Budgetary Responsibility estimates a 1% rise in price will cause a 1-1.1% fall in demand.

Finally, job loss is in the soft drink industry as a result of the tax is a concern. In particular, The British Soft Drinks Association claimed that such a tax would cost 4,000 jobs in the industry. However, this estimate failed to take into account reformulation, which as mentioned will be the majority decision among UK beverage corporates, and revenue investment. Indeed, possible investment in the NHS or sport development programs among schools could offset these over-estimated loss of jobs, validating the tax.

Although a sugar tax on its own is justified as a means of reducing sugar intake, as there is evidence sugar intake will decrease without any major caveats, a behavioural element should accompany it. The clear evidence that consumers are influenced heavily by marketing techniques means nudges such as different aisle placements for sugary drinks should accompany such a tax to further reduce sugar intake, thereby augmenting the tax’s validity.

Economics of a Sugar Tax - revision video

Economics of a Sugar Tax (Market Failure & Government Intervention) - revision video

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