H2 WA2 (Full Answer with Examiners' Report)

The consumption of sugary beverages is linked to health issues like obesity, diabetes, and dental problems, impacting both individuals and society. Challenges in accessing accurate information about these risks exacerbate the problem. To address this, Singapore's Ministry of Health introduced Nutri-Grade labeling and advertising restrictions in December 2023. This system assigns grades from A to D, with D indicating the highest sugar content, aiming to reduce sugar intake and shape consumer behavior in the long term. (a) Explain two reasons why there may be an inefficient allocation of resources in the market for sugary beverages. [10] Part (a) Question interpretation Command word Explain two reasons Elaborate why Content required Inefficient allocation of resources which does not optimize society’s welfare Market failure Context Market for sugary beverages “impacting both individuals and society” - Negative externalities “Challenges in accessing accurate information about these risks exacerbate the problem” - Imperfect information Approach: • R1: Explain how negative externalities arising from the consumption of sugary beverages lead to market failure. • R2: Explain how imperfect information about the consumption of sugary beverages lead to market failure. Suggested answer Introduction Market failure is said to occur when free markets, operating without government intervention, fail to deliver a socially-efficient allocation of resources and hence economic welfare is not maximized. Consumption of sugary beverages may generate negative externalities, which leads to market failure. At the same time, individuals may also have imperfect information about the true benefits of consuming these goods, which also contributes to market failure. In this essay, I will explain why negative externalities from the consumption of sugary beverages and imperfect information about these beverages will result in an inefficient allocation of resources in this market. Define key terms Overview Body – R1: Negative externalities in consumption In the consumption of sugary beverages, consumers consider only their marginal private cost (MPC) and marginal private benefit (MPB). The MPC of consuming an additional unit of sugary beverage includes the cost of the drink itself as well as the increase in medical expenditure from the possible development of health issues in oneself, such as obesity, diabetes, and dental problems. The MPB of consuming an additional unit of sugary beverage is perhaps the increase in wages as a result of higher productivity in the workplace as a result of stress relief that such beverages may give. Rational Explain private equilibrium

and self-interested consumers will consume QP amount of sugary beverages where MPB = MPC, the private equilibrium level, to maximise their net benefit. But over and above this private cost, the consumption of sugary beverages places an additional cost on third parties who are not directly involved i