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Government Intervention into the Soft Drink Market
Introduction
In recent times the public health sector has put up with varying concerns of the twentieth century. As it were the advancements in the technology industry and economy have motivated the rise of a new health concern in the form of obesity. Essentially it is a condition described as having a body mass index of 30 or more. Statistics suggest that the condition is much more serious among adults who range between 20 and 39 years. Even more compelling the condition is more prevalent among Afro-Americans whose prevalence rates are up to 51% which is 30% higher than the rate associated with Hispanics all weighed against the white population.
Abstract
Before the commencement of the 20th century, the concerns raised by obesity were minimal. It was not until 1997 that the world health organization recognized obesity as a global epidemic that it began to draw attention, it is estimated that at least 400 million adults are obese worldwide with the number being greater among women than in men. By then it was only associated with which income countries but with time it has spread all over the world with the Australia United States and Canada taking up the greater share (Dangour et al, 2010).
Obesity has been associated with common diseases such as diabetes heart disease hypertension cancers as well as arthritis. This has resulted in enormous spending that has been directed to the maintenance and treatment of patients that suffer from this condition. In the US the annual spending as reported by the center for disease control back in 2008 went to the tune of 147 billion.
It is undeniably true that the obesity issue is an urgent cause of concern for any modern-day health sector. Health scientists have indicated that the condition can be caused by several factors all of which point to a combination of dietary calories little physical activity as well as vulnerability linked to genetic history. The general layman impression is that the condition is caused by excessive eating. However, this is not the case since there is factual evidence indicating a contrary position. It is not so much a question of how much the individual consumes but rather a question of what the person eats and how often.
Obesity is ranked top in the list of preventable causes of death worldwide. The mortality rate among smokers is much higher than among nonsmokers. The European Union loses up to 1 million people an equivalent of 7.7% of its population to obesity related causes of death. In the USA the number ranges between 111909 and 356000 deaths every year. In Australia, the number of women who are obese and have diabetes is higher than that of men with diabetes as seen below.
To put the discussion into perspective this report aims at exposing the role played by soft drinks in accelerating the obesity rates in Australia. It will give specific regard to the extensive set of choices in as far as positive and negative production and consumption externalities are concerned and the causes of action that may be taken to overcome the effect of obesity on society and the economy as a whole.
Positive and negative production and consumption externalities
An externality from an economic stand refers to a benefit or cost that accrues to a party in the production or consumption process that cannot by its nature reflected in the price. Therefore they are borne solely by the party to whom they accrue. If the externality results in a cost then it is considered as a negative externality while those that act to benefit the individual are considered as positive externalities.
Negative externalities have often been associated with social costs. They are connected to actions of a consumer or producer which harms a third party. The majority of these costs therefore are associated with the environment in aspects such as pollution, climate change, systematic risk, industrial and farm animal production effects, marine pollution.
In the production process, there are a host of processes that are continuously producing by-products that in most cases harmful to the environment. The resultant cost I the management of pollution levels is borne solely by the producer since they are not part of the costs involved in the manufacture and creation of the product that is sold to the consumer. The consumer on the other hand suffers negative externalities in the form of conditions such as obesity. The producer does not have an obligation to restrict the consumption of the product by the consumer. Therefore the consumers negligence or lack of concern leads to the incurrence of negative externalities
Positive externalities on the other hand are in a strict sense the unpaid for benefits that arise from the consumption or production process. For instance, if a student purchases education from a college the positive externalities that will accrue to the society and the country at large come in the form of an informed voter as well as a critical and resourceful member of society. They can therefore be referred to as benefits to society. They are a summation of the private benefits that are enjoyed by owners or purchasers as well as the society in general from the production and enjoyment of goods and services (Rabl et al, 2005).
The standard economic philosophy of any competitive market is that any form of exchange that is voluntarily engaged by the parties in the market gives benefits to both parties otherwise neither party will agree to commit themselves to it. Inadvertently there are ripple effects that will be generated by the engagement by these parties. The nature of the effects forms the basis of the categorization into negative or positive externalities. Where it is positive, the third party stands at an advantage but if it is negative the third party will be forced to incur a cost or disadvantage (Steven and Michael, 2011).
Historically there has been little success buy economic scientists in the evaluation of a specific formula to be used in the calculation of the externalities. In effect, the costs have been ignored. The market prices in a normal competitive market therefore will do little in reflecting the effect and contribution of externalities (De Bandt, and Hartmann, 1998).
Hackett and Moore (2011), in the book Environmental and Natural Resource Economics suggests that positive externalities are not easily provided by a competitive market and when they are available they cause an increase in the demand for the product since they are not paid for as shown in the diagram below.
There is little production in the presence of social benefits. The change I price represents the effect of the introduction of social benefits. The introduction of social benefits is often much more expensive than the resultant benefits themselves since competition frown at them.
The introduction of social benefits increases the demand for the product due to the unpaid-for goodwill represented by change A. The consumer will be ready to increase their demand (B) for the product given the introduction of the social benefits. This increase will be associated with the increase in the number of customers that acquire the product as opposed to its competitors. The change from private benefits to social benefits amounts to positive externalities.
A lot of research ink has been spent on establishing the connection between soft drinks and obesity. Even though there is unlimited information on the subject, little progress has been made in achieving a justification for the claim. However, it is common ground that there exists a relationship between soft drinks and obesity. The degree of the relationship and its nature form a diverse range of opinions that have been developing (Knutson et al, 1989). There could be a relationship interdependent in that obese people consume more sodas as opposed to the idea that people who consume soda become obese. The latter opinion bears little support in the evidence and therefore can be readily dismissed. Most market scientists opinion tends to favor a correlation rather than a causation relationship.
Therefore it is imminent that the interests of the third party in the soft drink trade in connection to t obesity debate require a proper understanding of this market relationship. Not many parties understand this and in effect the level of information by the consumers is shallow.
Obesity mainly points to an unbalanced diet. Half the time, people who develop this condition do not take a balanced diet. It could be the case that consumers result in soda consumption as an alternative to supplement their diet due to limited choices that are available to them. That being the case the consumers preference would be the only remaining determinant of the representation of these interests. This however is influenced by the changing trend in the food production sector. The contemporary market trends suggest a consumer preference-sensitive trend that allows the consumer to have their interests represented.
Proponents of the taxation policy that seeks to increase the tax on soft drinks suggest that the impact of negative externalities is inadequately represented. This would suggest a market failure situation that leads to excessive consumption of the product. The customer therefore is left to incur additional costs in the form of medical expenses that accrue to the obesity condition.
They suggest that an increase in taxes to cover these costs would provide a solution to the obesity menace. The justification being that the prices would go up and in effect decrease the number of people who consume the soft drink and in effect, the number of people who are obese will decrease.
This argument however does look quite farfetched given the fact that there is no actual evidence of a true cause and effect relationship between soft drinks and obesity. It would therefore be an exercise in futility so attempt to provoke the producers into stating their position given that the market stands in their favor.
Should the Australian government intervene in the soft drink market?
The soft drink market like any other operates under the premise of competition. The intervention of the government will therefore need to bear a good justification that will license the intervention measures that are to be adopted.
Several matters are bound to raise eyebrows. As it is there is no conclusive evidence as to the connection between soft drinks and obesity. If it did exist the implication in line with the economic philosophy and theory will be to indicate obesity as a positive externality. This would be on the justification that the product is achieving its objective and that the suppliers were delivering quality products into the market. Therefore to suggest an increase in the prices would be going against the provisions of the market forces and discouraging competition.
The role played by soft drinks in the obesity debate is very minimal as compared to other food sectors. It would therefore be unjust to pin down the soft drink market alone without bringing aboard all other participants who take up a larger share of the blame. The intervention by the government will therefore provoke a ripple of reform that will affect a great industrial revolt. Managing this kind of social change will be more costly and less effective (Arrow, 1969).
Therefore it would be a retrogressive move top attempt to regulate the soft drink market based on the obesity debate.
Conclusion
It beats common sense to suggest that government intervention into the soft drink market alone will provide a long-term solution to the obesity problem. The consumer is bound to look for alternative substitutes for the soft drinks to satisfy the need for the caloric effects.
A move by policy markers if any would amount to retrogression since the true reason behind the increased consumption of soft drinks lies beyond the obesity debate since the low-income earners spend more on these drinks more than the high-end income bracket.
References
Arrow K. (1969). The Organization of Economic Activity; Issues Pertinent to the Choice of Market versus Non-market Allocations, in Analysis and Evaluation of Public Expenditures. The PPP System. Washington, D.C., Joint Economic Committee of Congress.
Dangour, A, Karen, L, Arabella, H, Aikenhead, A, Allen, E and Uauy, R. (2010). Nutrition-related Health Effects of Organic Foods: A Systematic Review. American Journal of Clinical Nutrition.
De Bandt, O, and Hartmann, P. (1998). Risk Measurement and Systemic Risk: Web.
Knutson, R. C, Taylor, J. Penson, A and Smith, E. (1989). Economic Impacts of Reduced Chemical Use. College Station, TX: Knutson and Associates.
Rabl, A., Hurley, F., Torfs, R., Int Panis, L., De Nocker, L., Vermoote, S. (2005). Externalities of Energy Methodology 2005 Update, Impact pathway Approach Exposure-Response functions. Luxembourg. European Commission Publications Office.
Steven C. H, Michael, C. M. (2011). Environmental and Natural Resources Economics: Theory, Policy, and the Substainable Society. New York. M.E. Sharpe.
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