This article discusses implications of a tax on sugary drinks (sodas) passed as a bill in South Africa by the South African parliament.
From the diagram above it is clear that when placing an ad valorem tax of 11% per can (sugary drink), the cost of production goes up and the supply curve shifts to the left, hence decreasing the overall supply of the sodas.Sugary drinks(sodas) are low in cost and easily accessible , thus the demand for these drinks are relatively high. Since there are a number of available alternatives to the sodas, when an 11% tax is imposed and the price increases, the demand for the sugary drinks resultantly falls. Sugary drinks is a demerit good.
A demerit good is one for which the marginal socialcosts exceed the marginal social benefits when sold on the open market. Negative externality goods such as sugary drinks are generally considered to be demerit goods and because of their extra costs to society, they are considered to be overproduced and over-consumed.The market for sugary drinks in South Africa is an example of market failure.Since sugary drinks have a negative externality of consumption , the marginal social benefits its less than the marginal private benefits as shown in the diagram above.
Consumers only consider private benefits, thus the free market equilibrium will be at P1, Q1 as shown in the diagram above. Sugary drinks are over consumed by (Q1-Q) units. Between Q to Q1 MSC is greater than MSP, since MSC is greater than MSP there is a welfare loss. By imposing an indirect tax , the MPC shifts upwards thus potentially eliminating the welfare loss. This loss will be completely eliminated if the tax is equal to the negative externality of consumption A tax on the sugary drink increases the marginal private cost and shifts the private supply to the left. This has the beneficial effect of reducing consumption,perhaps to some point close to the optimum level of Q.
When looking at the effects of the indirect tax. Firstly, there will be an increase in prices for the consumer as the price increases from P to Ptax for the same quantity demanded. Secondly the producer revenue decreases as it decreases from Ptax times Q1 to P times Q. Moreover,the government receives a certain amount of revenue from the imposition of the tax , shown by ((Ptax-P)*Q) in the diagram. According to the article “South Africans were among the top 10 consumers of sugary drinks in the world”.The introduction of the taxation on sugary drinks can lower the overall consumption of these sugary drinks in South Africa by increasing their prices and reducing their supply so as to deter consumers from consumption. This helps reduce excessive sugar intake thereby reducing cases of obesity and other health related diseases.
With such a high rate of mortality associated with diabetes since according to the article “diabetes alone claimed more than 25 000 lives in 2015”,doing nothing to reduce sugar consumption will just add to the morbidity and mortality associated with South Africa’s growing burden of noncommunicable diseases, particularly those related to obesity. Furthermore the South African government receives revenue from the taxes imposed. This revenue raised from the taxes can be spent on efforts to improve health care systems or can be used to fund the production of merit goods which can further benefit the society.The sugary drinks tax can be seen as a sort of regressive tax as richer people pay a lower proportion of their income. Hence it can be argued that increasing tax will take a higher percentage of tax from those on low incomes,reducing their disposable income and decreasing living standards. However,sugary soft drinks are not a necessity, therefore consumer that are unable to afford these soft drinks can in fact choose healthier alternatives instead of having to bear the burden of the tax by consuming sugary drinks.
Furthermore, it could be argued that the government should not be able to make judgements about people’s lifestyle and influence consumer patterns. In the short run consumers may not benefit from this tax as all it does it reduce the choices in the market and their ability to make that choice. However in the long run, it will benefit consumers as they will see an increase in health with the reduction of consumption.
This will also decrease the health cost associated with obesity and excess sugar consumption incurred by the government.Since the tax reduces producer revenue, the imposition of the tax could lead to structural unemployment. Most workers at the soda/sugary drinks companies are typically manufacturing workers who have a lower skill set or those working in the service sector industry selling sugary drinks. The tax might lead to them losing their jobs because companies are forced to let go of them in order to reduce costs and they may not have the skill set required to find other jobs.Likewise companies can decide to absorb the tax increase at the source themselves thus leaving the price of their products untouched, thus furthering decreasing producer revenue while at the same time not achieving its original goal of deterring customer from consumption of these drinks.On the other hand the tax will in turn encourage the demand for healthier alternatives while also convincing the industry to reconsider the formulation of their products and marketing strategies. A sugar tax creates an incentive for firms to supply alternatives which are healthier or even lower content of sugar per can.
In conclusion, the probable advantages of the imposition of the tax outweigh the probable disadvantages of the tax. Overall, there will be a net welfare gain from a sugar tax, with minimal economic disruption.