Consumption Tax on Sugary Drinks

This assignment analyzes the potential impact of a consumption tax on sugary drinks. It discusses the relationship between price elasticity of demand and the effectiveness of such taxes in reducing sugar-sweetened beverage (SSB) consumption. The report considers the implications for obesity rates and examines ways to improve the effectiveness of consumption taxes on SSBs, particularly focusing on their impact on low-income households and vulnerable populations.

A Sugary Drink Tax

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1 DEFINITION AND CONCEPTS............................................................................1
1. Tax incidence...........................................................................................................................1
2. Economic lesson applicable to taxing surgary drinks..............................................................1
QUESTION 2 MARKET ANALYSIS............................................................................................1
1. Diagram presenting market for sugar-swetened drinks...........................................................1
2. Diragam representing Australian sugar market.......................................................................2
3. Impact of introduction of sugar drink tax on non-sweetened items.........................................3
QUESTION 3 POLICY EFFECTIVENESS AND ALTERNATIVE STRATEGIES....................4
1. Interpreting elasticity estimates and its relatinship to the tax on consumption of SSDs.........4
2. Ways to improve effectiveness of consumption tax on sugary drinks.....................................5
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Obesity and its relevant health problems is an increasing concern in Australia.
Government often charge taxes to alter the behaviour of both the consumers and buyers targeting
economic welfare. A sugary drink tax is a surcharge charged targeting minimizing the
consumption of drinks with sugar. It includes drinks like carbonated soft drink, energy drink and
sport drinks. The main aim of the assignment is to critically evaluate how taxing sugary drinks
will impact the economy.
QUESTION 1 DEFINITION AND CONCEPTS
1. Tax incidence
Tax incidence refers to the distribition of taxation obligation between buyers and sellers.
It presents that whether consumers or producers will pay price of the imposed tax. In economies,
tax burden or incidence is the examination of effect of particular tax distribution targeting
economic welfare. It depends upon the price elasticity of demand & price elasticity of supply. It
is because, imposing tax ultimately leads to increase price and affet buyers demand (Deng and
et.al., 2017).
2. Economic lesson applicable to taxing surgary drinks
According to the Gans and et.al. (2015), Sugary drinks tax is applicable to the economic
lesson: 6 that indicates that markets are usually a good way to organize economic activity. The
principle tells that levy of taxes distort goods and service prices and affects household decisions
because it have a direct impact on prices that helps in reducing excessive intake of sugary drinks
(Gans and et.al., 2015).
QUESTION 2 MARKET ANALYSIS
1. Diagram presenting market for sugar-swetened drinks
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The diagram clearly evidenced that when Governement levied tax duties on the
consumers/buyers, then as they would need to pay higher prices, therefore, quantity demanded
will decrease. As reflected in the diragm, demand curve comes down from D1 to D2. Hiowever,
as supply is not effected, therefore, equilibrium point came down from E1 to E2 (Leatherman and
Garett, 2015). It indicates that although due to tax incidence, customers will pay increased price
inclusive tax (P0), however, price exclusion of tax is denoted as P2 shows lesser quantity demand
than earlier point when no tax is charged on sugar-swetened products.
2. Diragam representing Australian sugar market
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Q2 Q1
P2
P0
P1
E2
E1
Tax
S1
E2 Tax
P0
P2
Q2
D2
P1
Q1
E1
D1
S1
Unit price of suger-
swetened drinks
Quantity demand and supply of
suger-sweetened drinks
S2
D1
Unit price

The graph above reveals that if in Australian sugar market, tax is levied on sugar-
sweetened drinks, than, due to higher prices, supply will be constrained. In the above graph, it
represent upward change in the supply curve from S1 to S2 that decline quantity from Q1 to Q2.
As a result, Equilibrium point changed upward from E1 to E2, at the point, price P2 indicate
charges inclusive of taxes whereas the net receipts for the products after payment of tax fall
below the earlier price of P1 to P0 (Mankiw, 2014). Thus, it becomes clear that after direct
impose of tax on sugar-sweetened drinks (SSDs), the equilibrium price will be increase due to
tax whereas quantity of sugar will be declined.
3. Impact of introduction of sugar drink tax on non-sweetened items
A sugary drink tax on SSDs will definitely tends to reduce consumption of sugar-added
drinks and also encourage consumers to switch to non-sugary, artificaly sweetened and low-
sugar containing beverages and drinks. It is because they are non-taxed drinks therefore, they
will be available to the buyers at cheaper rates, hence, buyers will start consuming such items as
a subsitute (Etilé, Lecocq and Boizot-Szantai, 2016). Evidencing it from the findings of Veerman
and et.al. (2016), study, which used Australian price elasticity estimates which reported that
cross price elasticity is found to have a significant impact on the artificially sweetened drinks
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Demand of sugar -Sweetened
drinks
Demand of non-sugary added
drinks
Tax on SSDs
Price
Quanitity demand
Before tax
Quantity demand and supply

when tax is levied on SSDs. The diagram clearly reflects that before tax, demand of SSDs grows
up wheres after tax imposed by the government, it decreased, by contrast, other non-sugar
containing drinks were in larger demand as its demand curve grows above the demand of SSDs.
QUESTION 3 POLICY EFFECTIVENESS AND ALTERNATIVE
STRATEGIES
1. Interpreting elasticity estimates and its relatinship to the tax on consumption of SSDs
Price elasticity presents responsivenss of the customers that how the change in prices of
Sugar-Seetened Beverages (SSBs) will affect their demand. It is commonly negative because
price and quanity demand follows inverse relationship.
Price elasticity( Ep) :%c h ange∈Quantity demand /%c h ange∈ price
∆ P
∆ Q
Ep of -0.9 reported by Gratten Institute, that is less than 1 (0.9<1) denots that SSBs has
relatively inelastic demand, it means, that change in prices would not have a significant impact
on the demand. In other words, demand will be decrease by a lower proportion compare to the
proportionate increase in price. Thus, if government charges taxes on such products, than, it will
not bring a considerable decrease in the demand because customers are less price sensitive
(Bernanke, Antonovics and Frank, 2015). Thus, as a result, it can be said that governmental
authorities would not be able to reduce consumptions of such items to a target extent and would
not be helpful in decreasing obesity level.
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Ep<1
D
Unit price
Quantity demand

2. Ways to improve effectiveness of consumption tax on sugary drinks
The scenario reflects that children, teenagers and low-income households excessively
intake high proportion of sugary drinks. Low income households are commonly price sensitive
means their buying decisions are directly affected by the change in prices. Hence, if in case,
taxes is charged on the consumption of SSDs, then, undoubtedly, people witll start switching
their buying preference to close subsitutes such as non-sugar added drinks and artificially
sweetened drinks (Gans and et.al., 2015). Such decisions would assist government in
minimizxing excessive intake of sugar containing drinks that rises obesity and other health
concerns. Thus, it can be said that as the product is largely consumed by such people therefore,
demand would be highly elastic, hence, little bit increase in prices as a result of tax would
definitely tends to decrease demand to a great extent.
CONCLUSION
The research report concluded that levied tax on the consumption of sugar-sweetened
drinks tends to reduce its consumption and drive more demand for alternatives like artificially
sweetened beverages and other non-sugary drinks. However, lastly, price elasticity of 0.9 show
that it has relatively inelastic demand, in such situation, charging tax would not bring
considerable decrease in the consumption, as a result, obesity concern will still remains an issue.
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REFERENCES
Books and Journals
Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill
Higher Education.
Deng, J. and et.al., 2017. A novel power market clearing model based on the equilibrium
principle in microeconomics. Journal of Cleaner Production. 142. pp.1021-1027.
Etilé, F., Lecocq, S. and Boizot-Szantai, C., 2016. The Incidence of Soft-drink Taxes on
Consumer Prices: Evidence from the French Soda Tax. In CERGAS Bocconi Seminar
series. 15(3). pp. 73-85.
Gans and et.al., 2015. Principle of Economics. Cengage Learning Australia.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
Online
Leatherman, C. and Garett, A. T., 2015. Principles of Tax analysis. [Online]. Available through:
http://www.rri.wvu.edu/webbook/garrett/chapterthree.htm.
Veerman, L. J. and et.al., 2016. The Impact of a Tax on Sugar-Sweetened Beverages on Health
and Health Care Costs: A Modelling Study. [Online]. Available through: <
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4830445/>.
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