Sugary drinks tax removal in Israel

The new government in Israel has removed the sugary drinks tax, which was implemented last year. This will definitely increase the market failure as such demerit goods lead to negative externalities when consumed. Make sure you understand that negative externalities are external costs on third parties and not the consumer or producer. Hence, obesity and type II diabetes as a consequence of excess sugar consumption are internal costs as they are incurred by the consumers. However, the additional healthcare costs that society (taxpayers) pay for their treatment, or the lower productivity of the workforce can definitely be regarded as external costs.

IB Economics Internal Assessment (IA) Commentary

In the IA, I’d use the key concept of efficiency and explain why this story leads to market failure in the market for sugary drinks in Israel. However, you can also use choice as it is clear that the government is referring to the high costs of living which the tax removal aims to address – this is something you should also consider in the evaluation. In addition, keep in mind two more things: 1) indirect taxes are addictive in nature and 2) sugary drinks can be addictive (reference to ultra-Orthodox “communities for whom sweetened drinks are a popular accompaniment at holidays and gatherings”) and thus the demand for the good is price inelastic. Lastly, as stated above too, make sure your evaluation is balanced and while considering the disadvantages of the tax removal, don’t forget to mention the merits of this decision.

Source of image: Nati Shohat/Flash 90

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