2018 GCE A Levels Economics Paper 1 Micro Answers: Rational Decision Making of Consumers of SSBs

Discuss whether consumers could ever make rational decisions regarding their consumption of sugar-sweetened beverages (SSBs)?

Comments: The A level examiners are testing students' ability to understand the factors that affect consumer rational decision making process, which does not involve consideration of external costs. Many candidates would just argue consumers may not make rational decisions about consuming SSBs due to negative externalities (i.e. declines in work productivity and healthcare cost burden on govt as a result of increase in obesity related illnesses from over-consumption of SSBs). There will be no credit given to this answer. Rather, the correct answer should be consumers may not make rational decisions in consuming SSBs due to imperfect information about the detrimental effects. Within this analysis, the examiner accepts candidates which discussed either the gap between perceived and actual costs OR the gap between the perceived benefit and actual benefit.

Suggested Answer:

In the consumer rational decision making process, the consumer seeks to maximise total utility by consuming up to the point where Marginal Benefit (MB) = Marginal Cost (MC).

Consumers may make rational decisions by considering MB versus MC in their consumption of SSBs. The MB of consuming SSB would be the enjoyment and utility that is derived from consuming each additional unit of SSB. In extract 2 (seen above), the utility of consuming SSB also includes the reduced likelihood of falling ill from drinking tap water since "many communities do not have safe tap water". This explains the higher level of MB for SSBs in Mexico, "where bottled and canned SSBs are part of the culture". This is then weighed against the MC of consuming SSB, which includes the personal related healthcare costs of obesity related illnesses such as diabetes and heart disease, as well as the price of the SSB. Assuming no information failure, consumers will be making rational decisions about their consumption of SSBs.

{Insert MB/MC diagram to show a high MB relative to MC in Mexico}

However, consumers may not make rational decisions regarding their consumption of SSBs due to possible information failure. This is because consumers may not be fully aware of the personal related healthcare costs of obesity related illnesses. They may have under-estimated these costs due to misleading information caused by persuasive advertising. In extract 2 (seen above), it was stated that "producers put millions of dollars into food marketing to strengthen their brands and differentiate their products". This means that there is extensive advertising efforts to portray SSBs in better light, to the extent that induces consumers to downplay the extent of these healthcare costs. This is especially so for children who may have been easily misled into consuming SSBs as they are often bundled with toy collectibles. Also, imperfect information could have been due to ignorance since the actual nutritional content of SSBs is complex and not easily interpreted by a layman, as well as lack of critical information, where nutritional labelling on healthier drink options may be lacking. As such, the perceived MC is lower than the actual MC, resulting in over-consumption of SSBs.

{Insert imperfect info diagram to show perceived MC is lower than actual MC, resulting in over-consumption of SSBs as a result of imperfect information}

In the evaluative conclusion, it is worth noting that rational decision analysis assumes consumers have perfect information about the incremental benefits and costs associated with consuming each additional unit of sugar-sweetened beverage (SSBs). It is highly unlikely for this assumption to be achieved due to persuasive advertisements by major SSB companies unless there are mitigating measures by the government to increase the awareness of the personal-related healthcare costs via campaigning or restrictions on SSB advertisements. That said, it may also be argued that overconsumption of SSBs can be a rational decision taking into account the information that the consumer has at that given point in time. This is especially pertinent in Mexico, where drinking SSBs is preferable to drinking unsafe tap water. In this case, it would be rational to discount the long term health impact of drinking SSB as they would have been more likely to fall sick if they had consumed tap water instead.