Efficient taxation of sugar-sweetened beverages and missing markets for sugar content

This paper identifies missing markets for the sugar content of sugar-sweetened beverages (SSBs) as a novel foundation of soft drink taxation. If the social marginal value of sugar content is negative, then missing price signals imply an inefficiently high sugar content. Efficiency is restored with a tax on the sugar content per unit of the SSB, augmented by a subsidy on the SSB. In an empirical calibration to the UK, the optimal SSB subsidy is small, whereas the optimal sugar content tax is 0.38 pound per liter and, thus, one and a half to two times larger than the tax rates implemented by the UK's soft drink levy.