Market Failure occurs when there is an inefficient allocation of resources in a free market. Market failure can occur due to a variety of reasons, such as negative externalities (over-consumed) or demerit goods (usually not provided in a free market). Negative Externalities are defined as the external costs incurred by third arties. They are the negative spillover effects borne by the society and not producers or consumers. Demerit goods are an example of goods that lead to negative externalities. Demerit goods are goods that incur social costs and are over provided and over produced by firms and the government discourages its distribution. Egg. Cigarettes and alcohol.
Sugary Foods is an example Of negative externalities Of consumption, where the consumption of the product causes the Marginal Social Benefit product to be much less than the Marginal Private Benefit. Marginal Private Benefit is the infinite received by the consumer by consuming one extra unit of the good. The consumer may benefit from consuming Pepsi or Ores but society will not benefit from this. Sugary foods, due to their adjectively sweet flavors and lack of healthier subsistent, tend to have a very low PEED. Thus they are price inelastic. Price Elasticity of Demand is described as the relative change in the quantity demanded when compared to relative change in price.
A consumer of sugary foods is more likely to suffer from obesity or diabetes and thus, will be absent from work more often. They will not be TABLE to nutrition to the national income and firms will be inefficient. Furthermore, hospital care will be spent on the patients suffering from diseases caused by sugary foods. Foods and drinks such as Chips and Pepsi also come in plastic packets and cans. These items, if not discarded properly will degrade the environment by creating a dirty atmosphere and harming green life, insects and bacteria in the process. Figure 1 shows how Marginal Private Benefit (MAP) is greater than Marginal Social Benefit at all quantities.
Soda drink is being sold at a price Of up at a quantity of QPS. The socially optimum level of price and quantity is Pop and Quo. This graph shows that Soda Drinks are widely over consumed. To restrict this overcompensation, a system of tax on sugary goods has been introduced. This is also known as Fat Tax or Tax on Soda. Fig. 2 internalizing the externalities: Showing the effect of tax on MS and MAC Fig 3 From fig 2. We see that when a government imposes tax, the MAC shifts leftward to the MAC+tax, this reduces the quantity of soda drinks provided and also reduces deadweight loss. The increased price will lower the quantity demanded due to the law of demand. Taxes could be very beneficial.
Imposing a tax on Soda will increase the price of soda and put more of the burden on the producers, those who are causing the externalities. Consumers will begin to demand less. This would have some public health benefits. Furthermore, the extra revenue earned by the government could be used to subsidize fruits and vegeTABLEs and this may promote eating healthy and losing weight. However, due to the low PEED (price elasticity of Demand) value for Soda Drinks, increasing the price may not decrease the quantity demanded by a lot. So the government revenue is eased but quantity demanded does not fall to the socially optimum level. Thus taxes may not be the best way to internalize the externalities.
The government could negatively advertise sugary products and discourage schools from providing them. Not only can they discourage sugary products in school, but also raise awareness on the harmful effects of sugary products. For example diabetes and obesity. Other ways of internalizing the externalities, other than imposing taxes, include negative advertising. From figure 3 we can see that negative advertising will decrease the marginal public benefit and thus quantity ensured will decrease. The government or private firms can also take initiative to promote a healthy and balanced diet. Taxes also raise the issue of opportunity cost. Opportunity costs are the next best alternatives that consumers will have to give up to pay the tax.
The advice includes eating more fruits and vegeTABLEs and whole grains and limiting added sugars and fat. However, the panel goes beyond previous versions of the dietary guidelines by suggesting a broad list f possible policy changes ? a tax is just one ? that could make it easier for people to follow that diet advice. “Taxation on higher sugar- and sodium- containing foods may encourage consumers to reduce consumption and revenues generated could support health promotion efforts,” the committee wrote as part of the recommendations released this week. Such taxes have mostly failed to gain traction around the country, though voters in Berkeley, California, approved a special, per-ounce tax on sugary drinks in November.
In New York City, former Mayor Michael Bloomberg tried to cap the size of sugary drinks sold in restaurants and other venues at 16 ounces, but legal challenges spearheaded by the beverage industry brought down the effort in the courts. Other ideas put forth by the committee were placing nutrition labels on the front of food packages and requiring public buildings to serve healthier foods. The committee also suggested incentives for eating fruits and vegeTABLEs, though it didn’t detail how that could work. Panel members said incentives might be vouchers for farmers markets or subsidies for growers or grocery stores. The panel endorsed adding a line on the nutrition facts label or added sugars, which the Obama administration has already proposed.
It also backed the administration ‘s standards for healthier school lunches. Senate Agriculture Committee Chairman Pat Roberts, R-Kane. , criticized the report shortly after it came out Thursday, saying the committee strayed from its science-based nutrition recommendations. “This is economic, not nutrition, policy,” he said. Congress weighed in on a draft of the report last December, noting that the dietary guidelines panel was poised to suggest a more environmentally friendly diet of plant-based foods. In a massive spending bill, lawmakers instructed Agriculture Secretary Tom Villa’s “to only include nutrition and dietary information, not extraneous factors” in the final guidelines.
After the report was issued, Villa’s said the guidelines are supposed to be informed by the “latest and best science and medical knowledge. ” He wouldn’t address the content of the report specifically, but said he doesn’t want the final report to have “anything outside of the lines in the guidelines that would potentially undercut the legitimacy, credibility and acceptance of the guidelines. The IR-,l bib FAA law is fairly clear to me, it’s about nutrition and it’s about diet. ” C members say their panel was charged with looking at implication findings, and the policy changes were just suggestions. “The Idea stimulate thinking on how to get there,” Barbara Milled, the chain the committee, said Friday.
Alice Liechtenstein, a member of the professor at Tufts University, said there is some data that similar initiatives have worked, like efforts to ban trans fat from the food said the policy suggestions are to raise the issue for the future. S something for future consideration, I think that’s appropriate,” One former member of a dietary guidelines advisory panel disagree Lepton of Texas A&M university, who served on the 2005 dietary advisory panel, said her committee was told just to stick to the sic should show us studies that taxes have a beneficial effect,” she oz year’s panel. The beverage industry argued the same point. “The does not have the authority to make such recommendations, nor scientific evidence or expertise to back up its recommendations,” American Beverage Association said in a statement.