Tag Archives: Negative externalities of consumption

Taxes on fizzy drinks

With the increase in bulging waistlines and the rise in diabetes governments have been implementing taxes on surgary drinks to overcome this negative externality of consumption. The list of governments includes the following countries:

Hungary – in 2011 a tax on products with a high sugar content. The tax was calculated on the turnover of the company and the percentage of sugar per 100g of the product. Hungarian confectioners must pay the health tax on top of a 27% value added tax.

France – in 2012 a tax on all drinks with added sugar or artificial sweetener – US$0.08 per litre.

Mexico – in 2014 a tax on all sugary drinks of US$0.06 per litre. according to The Economist, in 2012 more than 70% of Mexican adults and 34% of 5-11 year olds were overweight and 12% of the population have diabetes which accounted for 14% of deaths in 2009.

Invariably the commercial sector believes that the government should not interfere with the market system and that consumers should be free to decide what to drink and eat. However the effect of a tax can be limited if the retailers absorb all the tax and therefore the price of the drink remains unchanged. Additionally a higher price because of the tax might not lead to any change in consumer behaviour as sugary drinks are very inelastic in nature to them.


In some cases the tax has been passed onto the consumer and it has had the desired effect. Coca-Cola’s Mexican bottler, blamed declining sales in 2014 on the price jump that followed the introduction of the tax.  Overall sales of sugary drinks fell by 1.9% in 2014, having increased by an average of 3.2% a year over the three previous years. Some have said that reduced consumption has only saved Mexicans 5 calories a day on average and that the tax is regressive in that it takes more from the lower income groups than their higher income counterparts. Lower incomes were more responsive to the tax cutting their consumption of surgary drinks by 17% within a year of its introduction.

Different levels of tax.

As is the case with Hungary taxes that equate to levels of sugar or salt seem to be more effective with up to 40% of manufacturers adjusting their offending ingredients used. France and Mexico with their flat rate taxes for sugar content give the beverage industry little incentive to make it drinks healthier.


The Economist – Stopping slurping – November 28th 2015


Neg Ext Cons

Cafeinated Drinks – Negative Externalities. But what about coffee?

Red Bull, V, Monster, Rockstar are just some of the drinks on offer to the general public, but are these drinks safe? America’s Food and Drug Administration (FDA) is investigating caffeinated products especially drinks. Revenue for these energy drinks is substantial:

USA – $8.6bn
Europe – $5bn

Leading brands in the US as a %
Red Bull – 36%
Monster – 29%
Rockstar – 8%

Monster and Rockstar have cans with 160mg of caffeine – a can of Coke has 35mg. The FDA recommend that no more than 400mg of caffeine should be consumed. With threat of stronger regulation Monster’s net income fell by 17% in the first quarter this year. However a large coffee from Starbucks has twice as much caffeine as a can of Monster but Starbucks seem to get off scot-free. The above is a good example of negative externalities of consumption.

Neg Ext Cons

Behavioural Economics: How to regulate the rate of alcohol consumption.

The Economist wrote a piece on the influence that the type of glass has on how fast you drink. Research by Angela Attwood of the University of Bristol has shown that the shape of a beer glass can regulate how quickly someone does drink. The experiment was done with 160 undergraduates – 80 men and 80 women – and they were asked to do one of four things.

1. Drink beer out of a straight glass
2. Drink beer out of a flute (a glass whose sides curve outward towards the rim)
3. Drink lemonade out of a straight glass
4. Drink lemonade out of a flute.

To complicate matters some glasses were half-full and others full. In order to acquire accurate research data the students were not told what the experiment was hoping to conclude but were led to believe that they were taking a language test after being shown various films. What the researchers were hoping to find out was how quickly the participants drank the 4 drinks. The time it took to consume the four drinks were as follows:

The full straight glass of beer – 11 minutes
The full flute glass of beer – 7 minutes
The full straight glass of lemondade – 7minutes
The full flute glass of lemonade – 7 minutes

The assumption from this experiment is that a beer drinker wishing to monitor how much he/she are drinking during the night uses the volume reamining in the glass with reference to the halfway mark. A curved-sided glass makes that judgment difficult and most volunteers thought the half-way mark in the flute was lower than its true value, and if a volunteer had drunk from such a glass originally, the degree of misestimation correlated with how fast he had drunk. If a glass is half-full to start with, however, this reference point is lost from the beginning. So the shape of the beer glass can affect how fast beer is drunk. Health campaigners and breweries might have differing opinions on what is the best shaped glass to serve beer.

Mobile phone going off – negative externality of consumption

I was reminded of this clip from Trigger Happy TV by John Wilson of Auckland Grammar. It depicts very well negative externalities of consumption. You are quietly wandering around a gallery – which you paid to enter – and suddenly a mobile phone goes off. The person answering it speaks rather loudly and distrupts the tranquil ambience of the gallery. You are assuming that the person when purchasing a ticket to enter the gallery had not consented to the mobile phone ringing whilst he was viewing the displays. However some may enjoy the spectacle and therefore it becomes a positive externality to them.

The Theory of Negative Externalities
This is where the consumption of a good may have spillover costs or negative externalities for others e.g. passive smoking, drink driving.

If left to the free market goods that have negative externalities of consumption will be under priced (pm) and over consumed (Qm) compared to the socially desirable price and quantity. The government could tax the good, increasing its price to Ps and lowering the level of consumption back to more socially desirable levels Qs.