Sugary drinks are demerit goods; “a good or service whoseconsumption is considered unhealthy, degrading, or otherwise socially undesirabledue 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 healthinsurance 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 healthcarefor obesity in Australia was about $8.6 billion. We can now conclude that the marketfor sugary drinks is an example of marketfailure; a situation when there is insufficient allocation of goods and servicesleading to a welfare loss, as according to economic theory, one of thetimes a market fails is when a demerit good becomes a negative externality ofconsumption. 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.

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 Pettinger,Tejvan. “demerit good definition.” slideplayer.

com. economicshelp.org, 28 Nov. 2016. Web. 30Jan.

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