Using your knowledge of both traditional economic theory and behavioural economics, assess policies that the Government might use to implement healthier diets across young people. (25)

Poor diets in the U.K. are likely to involve two types of market failure – the overconsumption of demerit goods (that consumers do not fully understand the costs of, such as sugar, fat and salt) and the underconsumption of merit goods (that consumers do not fully appreciate the benefits of such as fibre, vitamins and minerals). As a result, U.K. citizens will have worse health and this will impose a cost to a third party (negative externality), the taxpayer, through the strain on the National Health Service.One possible policy approach is to tax products that are high in a demerit good, such as the Soft Drinks Industry Levy that tax soft drinks with a high sugar content. Such an indirect tax, charged at two fixed unit rates depending on the sugar content, will effectively increase the firm’s cost of production (as they must now pay the tax). This means that at any given price the firm has less incentive to produce as it can earn less profit. This has the effect of shifting the supply curve to the left from S1 to S2. This increases the market-clearing price from P1 to P2, which causes a contraction of demand, reducing the quantity traded from Q1 to Q2 (which is socially optimal) and correcting the overconsumption.