This article is concerned with the governments action to correct the market failure in the

soda industry in Thailand as a form of ad valorem tax, a fixed percentage of the price of
the good sold. with a 20% tax on drinks with 6g to 10g per 100ml of sugar and a 25%
tax on those with more than 10g of sugar per 100ml.
There is market failure in the market for sugar due to the presence of a negative
externality of consumption. Negative externality is defined as a negative effect on a third
party due to the consumption of a good. Since the overconsumption of sugar causes
potential health and social problems like fatness, heart disease & overburdened public
hospitals, there is an increase in medical costs, inefficient allocation of medical resources
as wells as a decrease in productivity, the marginal social benefit is less than the marginal
private benefit.
In Figure 1, it is shown that the market had
equilibrium at (P,Q1) where MPC equals
MPB, however the social optimum quantity
is Q2 where MSB equals MSC. This
represents an overproduction and hence an
inefficient allocation of resources. There is
hence a deadweight loss to society in the
triangle between Pc and Pp , and Q1 and Q2.
In order to rectify this, the government
imposes the ad valorem tax to correct
negative consumption externalities by
increasing marginal cost of production,
shifting MPC upwards to MPC + tax until the
market reaches equilibrium at the social
optimum level Q1. The tax per unit increases
with price. With this, the area within PcPpQ2 becomes the government revenue as an
increase (in) national income by more than 10 billion baht a year in the future. Also, it is
important to note that the area PPpQ2 is the tax absorbed by the producer, while the area
PPcQ2 is the tax absorbed by the consumer.
In evaluation, it can be seen that the consumers of these sugary drinks bears most of the
tax, hence they must deal with the increased price. This would increase the cost of
consumption and would reduce demand of sugary drinks. As its demand comes mainly
from teens, their disposable income is the allowance they are given, increase in price
would increase the opportunity cost of consuming a sugary drink and would reduce the
demand. But on the other hand, it is readily available, and coupled with the lack of self
regulation in teens for immediate satisfaction, it would not serve as a deterrence of
overconsumption.
A further difficulty in resolving this market failure is that there could be an inelastic
demand. When the percentage decrease in quantity demanded is smaller than the
percentage increase in price, imposing taxes will not decrease the quantity demanded.
This means to reach optimum Q, a high tax would have to be imposed, which would be
politically unacceptable.
Overall, the addition of tax is a positive method as it lowers satisfaction received by the
consumer and uses the revenue earned to enforce other solutions to improve public
health. It might not have such a great effect in the short run as industries may choose to
leave their sugar contents unchanged and either absorb the tax or pass it onto the

consumer across their product ranges. This would render the effect of tax negligible, but in
the long run, the revenue earned will be able to fund other methods of resolving the
negative externalities, for example education as well as reallocation of resources to
improve public heath and into more healthy food industries. Also, in the long run, when
coupled with other means of curbing intake, the demand will decrease as it is not an
addictive like tobacco or alcohol and it will rotate to the long term cheaper option of water.
This would fulfill the ultimate goal.
According to this change, the policy would regulate lucky draw marketing campaigns by
sugary beverage manufacturers to further reduce sugar intake nationally. This is effective
as there will be less of an incentive to consume them. Also, with positive government
advertisements that reduces revenue, this could couple well with other means of curbing
like tax, education and the reformation of the food industry. They could also tax the
advertising, reducing the negative incentives.
In general, given the limitations above, with all policies (regulation, advertising and taxes),
it is only possible to move the economy in a direction towards correction of the externality ,
rather than achieving a precise allocation of resources where Q2 is produced and
consumed.