Sugary drinks are demerit goods; “a good or service whose consumption is consideredunhealthy, degrading, or otherwise socially undesirable due to the perceived negativeeffects on the consumers” and society as a whole. And demerit goods tend tohave negative externalities; “a costthat is suffered by a third party as a result of economic transaction”. Anexample of a negative externality in this case, is the inflation of healthinsurance costs for the entire society caused by the obesity of avid sugar consumers. According to the article, the OPC estimatedthat the annual cost of healthcare for obesity in Australia was about $8.6billion. We can now conclude that the market for sugary drinks is an example ofmarket failure; a situation when thereis insufficient allocation of goods and services leading to a welfare loss,as according to economic theory, one of the times a market fails is when ademerit good becomes a negative externality of consumption.
Diagram 1 below constitutes agraph for the market of sugary drinks in Australia indicating negativeexternalities of consumption. The negative externalities of sugary drinks areoften ignored by consumers, hence private benefits exceed social benefits, and sothe MPB curve lies above the MSB curve. MSC=MSB at the intersection of P* andQ* which indicates social optimal and market equilibrium, but the quantity consumedincreases from Q* to Q1 which disrupts the equilibrium and consequents in awelfare loss represented by the green triangle. The vertical difference betweenMPB and MSB represents the external costs.Pettinger,Tejvan. “demerit good definition.” slideplayer.com.
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