Intended to reduce national obesity

Intended to reduce national obesity problem, the UK's Local Government Association has recently exerted to appeal a fifth of VAT raised on unhealthy food to power more fund on public utility enterprises such as building more places for public health and leisure facilities. The consumption of junk food, according to the article, is in " the state of emergency", which applies voluminous private costs( the costs that the firm/ individual has to pay for production or consumption) and external costs or negative externalities ( the costs of production or consumption have to be paid by someone other than the firm/ individual). Junk food is a demerit good, that is to say, if it is over-consumed and over-produced, the free market will occur. The negative externalities connected with its consumption causes a misallocation of resources, leading to market failure.












The diagram presents the consumption of potato chips in given economy A. The marginal private benefit (MPB) curve represents the utility to the consuming of potato chips. The marginal social benefit (MSB) curve represents the cost to society as a consequence of the potato chips' consumption. The consumer will consume up to the point where marginal private cost equals marginal private benefit, or more precisely, the cost to the consumer of the additional unit is equal to the value of the benefit gained from the consumption of the additional unit.The private optimum level of consumption is at Qe. However, the benefit gained by the consumer is greater than the benefit enjoyed by society. Therefore, a marginal social benefit is less than marginal private benefit, the MSB curve is located leftward of MPB, resulting in a loss of welfare, represented by the leftward pointing triangle” welfare loss”.The social optimum level of consumption is at Q*, where marginal social costs ( MSC) equals marginal social benefit ( MSB). The demand for potato chips is represented by marginal private benefit (MPB), and vice versa, the benefit to society is represented by curve marginal social benefit (MSB), which located leftward of MPB since the consumption of the potato chips is lower, resulting in a loss of welfare, represented by the leftward pointing triangle “welfare loss”. Therefore, an increased in the number of potato chips would further expand the gap between private and social benefits of consumption, resulting in a greater welfare loss. As a result, it can be assumed that resources are being misallocated, as the economy is not following a correct path of development.