Practise explaining why public goods may be unprovided and merit or demerit goods misallocated, then evaluating whether government action improves on market outcomes.
A government wishes to ensure adequate flood defences are provided in its coastal areas.
Which action is most likely to be undertaken only by the government?
building the defences
designing the defences
financing the defences
maintaining the defences
Are doughnuts demerit goods?
Consumers love to eat doughnuts. In 2019, 10 billion of these deep-fried sugar-coated products were consumed in the United States (US). Fig. 1.1 shows that the US market increased steadily from 2011 to 2019. Doughnuts are widely available throughout the US. There are specialist shops selling their branded products almost everywhere; local coffee shops invariably sell 'hole in one' doughnuts as a popular breakfast snack to tempt consumers on their way to work. The growing number of shops selling doughnuts has been an important reason behind overall market growth.
Fig. 1.1 Doughnut market size in the US, 2011 to 2021
The COVID-19 pandemic has had a varying impact on the US doughnut market. Despite having less income, many consumers have continued to buy small luxuries such as doughnuts which remain affordable and can provide some short-term relief from the stresses of the pandemic. Overall, sales of doughnuts fell in 2020 and are forecast to remain below their 2019 peak into 2021. Reasons for this fall in demand are that consumers are making fewer shopping trips and in cities, more people are working from home and therefore not buying their daily coffee and doughnut snack.
In the United Kingdom (UK), more so than in the US, there are growing concerns about the increase in sugar consumption amongst children. This increase comes from soft drinks, chocolate biscuits and sweets (candy) as well as from jam-filled doughnuts, all of which are widely available in supermarkets and local convenience stores. In 2021, it was estimated that a third of teenagers and two thirds of adults in the UK were overweight. This has increased the pressure on the UK government to end online advertising of a range of products including doughnuts. It has been estimated that viewing one minute of advertising for products like doughnuts leads to a child consuming an additional 14.2 calories. Moreover, a ban on advertising sugary foods would result in children consuming the equivalent of 62 million fewer doughnuts a year in the UK.
Assess the likely effects on UK consumers and the UK government of a ban on online adverts for sugary foods.