Sugary drinks are demerit goods; “a good or service whose consumption is considered
unhealthy, degrading, or otherwise socially undesirable due to the perceived negative
effects on the consumers” and society as a whole. And demerit goods tend to
have negative externalities; “a cost
that is suffered by a third party as a result of economic transaction”. An
example of a negative externality in this case, is the inflation of health
insurance costs for the entire society caused by the obesity of avid sugar consumers

. According to the article, the OPC estimated
that the annual cost of healthcare for obesity in Australia was about $8.6
billion. We can now conclude that the market for sugary drinks is an example of
market failure; a situation when there
is 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 a
demerit good becomes a negative externality of consumption.

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Diagram 1 below constitutes a
graph for the market of sugary drinks in Australia indicating negative
externalities of consumption. The negative externalities of sugary drinks are
often ignored by consumers, hence private benefits exceed social benefits, and so
the MPB curve lies above the MSB curve. MSC=MSB at the intersection of P* and
Q* which indicates social optimal and market equilibrium, but the quantity consumed
increases from Q* to Q1 which disrupts the equilibrium and consequents in a
welfare loss represented by the green triangle. The vertical difference between
MPB and MSB represents the external costs.

Tejvan. “demerit good definition.”, 28 Nov. 2016. Web. 30
Jan. 2018.