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”.

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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.

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.

 Pettinger,
Tejvan. “demerit good definition.” slideplayer.com. economicshelp.org, 28 Nov. 2016. Web. 30
Jan. 2018.

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