Society collectively bears the burden of certain negative externalities, which stem from the

eating of junk foods. These external side-effects that materialize through trading can influence
other parties beyond those involved, they are known as Spillover costs. For example, medical
care costs related to obesity, heart disease, diabetes etc. that are eventually endured by taxpayers
or lost productivity on account of sickness.
The action of one economic agent reduces the wellbeing of another agent, but the first agent
doesn’t compensate the second agent. Also, that agent doesn't assume accountability for external
costs. As a result, these are transferred to society.

Figure (1)

Due to lower marginal costs, the supply curve shifts to the right in figure (1) and more junk food
is made and sold. Inequality of marginal benefit and marginal cost trigger deadweight welfare
loss. Here, the vertical distance between MPC and MSC is the negative externality. For every
output level, Q1, MSC gets higher than MPC by the extent of externality. So, optimum quantity
Q* moves to Q1. The deadweight welfare loss is exhibited by the triangle.
 Figure (2)

Figure 2 displays the placing of junk food tax (ft). The initial equilibrium Q1, P1 is not socially
ideal because externalities create costs, as demonstrated by the area of the triangle a-b-c. Society
suffers from people’s over-consumption. Fat Tax (ft) pushes the supply curve to the left to a
point where SMC equals PMB. This is the intersection of SMC and D, which is classified as
social optimum Q*, p*.
Placing a junk food tax would increase its market price, provoking a downturn in its quantity
demanded, as prices would enhance to p* and less unhealthy food is consumed (Q1 to Q*). Plus,
accumulated tax revenue (rectangle a-c-p*-p2) can be utilized to promote campaigns/policies that
would be beneficial for people’s health.