Q4 – 382 words
Identify one institution – these could be entities like unions or lobby groups or developments like the
passage of a law - that has changed the balance of power between economic agents in the last two
centuries and discuss its effects on the economy. Be as specific as possible about the country context and
time period in your discussion.
The UK Soft Drinks Industry Levy (SDIL) is a Pigouvian tax implemented in 2018, with the aim to reduce the
negative externalities associated with high soft drink consumption in the UK (Figure 1), particularly obesity.
Rising obesity is costing the NHS approximately £6.1bn yearly (‘Health matters: obesity and the food
environment’, 2017). It imposed a specific tax of 18p per litre for drinks containing over 5g/100ml of sugar
and 24p per litre for those containing over 8g/100ml of sugar (‘Soft Drinks Industry Levy comes into effect’,
2018), resulting in a long-term transfer of power from soft drink manufacturers to manufacturers of other
drinks, e.g., 100% juices.
Diagram 11 shows the externality
model where the after-tax price
received by manufacturers was
reduced (PP1). Consequently,
profit-maximising manufacturers
reduce output closer to the MSC
(QQ1). Assuming the tax accurately
estimates the external cost of
consuming soft drinks, the externality
is internalised in the price and output
is reduced to the Pareto-efficient
level (Escobar et al., 2013; Long ScD
et al., 2015).
Diagram
Manufacturers can either reformulate their drinks 1: Negative
to avoid the tax or externality diagram
maintain it and showing
lose sales the
through
higher prices: both reduce the effect of a Pigouvian tax on the soft drink market.
externality. Around 50% of
manufacturers chose the former (Bandy et al., 2020; Rathbone Greenbank Investment, 2019), which
resulted in a lower expected government tax revenue of £240 million (-53.8%) from the tax. This incurs
R&D costs for the manufacturers and has often dissatisfied customers. Meanwhile, brands like Pepsi and
Coca-Cola chose to pay the tax and exclude price-sensitive customers. Hence, the SDIL increased
manufacturers’ costs either through reformulation or a high tax. Bandy et al. finds that between 2015 to
2018, total soft drink sales under the SDIL fell 50% whereas they rose 40% for excluded manufacturers
(containing less than 5g/100ml of sugar) (Figure 2; Bandy et al., 2020), suggesting that the SDIL reduces
short-term sugar consumption but redirects spending to other drinks in the long-term. Therefore,
manufacturers of these (e.g., fruit juices (Finkelstein et al., 2013)) gain indirectly through the tax.
Although the magnitude of the effectiveness of health taxes for reducing obesity are disputed (Smed,
Scarborough, Rayner, and Jensen, 2016), the tax revenue raised has funded the Healthy Pupils Capital Fund,
upgrading primary school sports facilities to tackle childhood obesity and preventing multiple conditions in
adulthood, including cancers, cardiovascular disease, and type 2 diabetes (Wang et al., 2012; ‘Health
matters: obesity and the food environment’, 2017). Ultimately, the SDIL protects the future workforce and
government from the increasing fiscal and personal costs of these long-term conditions, either by reducing
consumption of high sugar drinks or redirecting them to less sugary drinks and therefore, changing the
balance of power between their manufacturers.
1
Note: this diagram was constructed using Microsoft PowerPoint.
1
Identify one institution – these could be entities like unions or lobby groups or developments like the
passage of a law - that has changed the balance of power between economic agents in the last two
centuries and discuss its effects on the economy. Be as specific as possible about the country context and
time period in your discussion.
The UK Soft Drinks Industry Levy (SDIL) is a Pigouvian tax implemented in 2018, with the aim to reduce the
negative externalities associated with high soft drink consumption in the UK (Figure 1), particularly obesity.
Rising obesity is costing the NHS approximately £6.1bn yearly (‘Health matters: obesity and the food
environment’, 2017). It imposed a specific tax of 18p per litre for drinks containing over 5g/100ml of sugar
and 24p per litre for those containing over 8g/100ml of sugar (‘Soft Drinks Industry Levy comes into effect’,
2018), resulting in a long-term transfer of power from soft drink manufacturers to manufacturers of other
drinks, e.g., 100% juices.
Diagram 11 shows the externality
model where the after-tax price
received by manufacturers was
reduced (PP1). Consequently,
profit-maximising manufacturers
reduce output closer to the MSC
(QQ1). Assuming the tax accurately
estimates the external cost of
consuming soft drinks, the externality
is internalised in the price and output
is reduced to the Pareto-efficient
level (Escobar et al., 2013; Long ScD
et al., 2015).
Diagram
Manufacturers can either reformulate their drinks 1: Negative
to avoid the tax or externality diagram
maintain it and showing
lose sales the
through
higher prices: both reduce the effect of a Pigouvian tax on the soft drink market.
externality. Around 50% of
manufacturers chose the former (Bandy et al., 2020; Rathbone Greenbank Investment, 2019), which
resulted in a lower expected government tax revenue of £240 million (-53.8%) from the tax. This incurs
R&D costs for the manufacturers and has often dissatisfied customers. Meanwhile, brands like Pepsi and
Coca-Cola chose to pay the tax and exclude price-sensitive customers. Hence, the SDIL increased
manufacturers’ costs either through reformulation or a high tax. Bandy et al. finds that between 2015 to
2018, total soft drink sales under the SDIL fell 50% whereas they rose 40% for excluded manufacturers
(containing less than 5g/100ml of sugar) (Figure 2; Bandy et al., 2020), suggesting that the SDIL reduces
short-term sugar consumption but redirects spending to other drinks in the long-term. Therefore,
manufacturers of these (e.g., fruit juices (Finkelstein et al., 2013)) gain indirectly through the tax.
Although the magnitude of the effectiveness of health taxes for reducing obesity are disputed (Smed,
Scarborough, Rayner, and Jensen, 2016), the tax revenue raised has funded the Healthy Pupils Capital Fund,
upgrading primary school sports facilities to tackle childhood obesity and preventing multiple conditions in
adulthood, including cancers, cardiovascular disease, and type 2 diabetes (Wang et al., 2012; ‘Health
matters: obesity and the food environment’, 2017). Ultimately, the SDIL protects the future workforce and
government from the increasing fiscal and personal costs of these long-term conditions, either by reducing
consumption of high sugar drinks or redirecting them to less sugary drinks and therefore, changing the
balance of power between their manufacturers.
1
Note: this diagram was constructed using Microsoft PowerPoint.
1
