Economic Impact of Sugar Drink Taxes

This assignment examines the economic principles surrounding sugar drink taxes. It analyzes the impact of such taxes on both the market for sugary drinks and the broader sugar market. The assignment delves into concepts like elasticity of demand, consumer behavior (considering income and demographics), and the effectiveness of taxation in achieving public health goals.

Running Head: ECONOMIC PRINCIPLES
Economic Principles
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Author note

ECONOMIC PRINCIPLES
Table of Contents
Answer 1..........................................................................................................................................2
Answer i.......................................................................................................................................2
Answer ii......................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer i.......................................................................................................................................3
Answer ii......................................................................................................................................4
Answer iii.....................................................................................................................................5
Answer 3..........................................................................................................................................6
Answer i.......................................................................................................................................6
Answer ii......................................................................................................................................6
References........................................................................................................................................8
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Answer 1
Answer i
When government levies a tax, it creates burden on relevant group directly or indirectly
(Mankiw 2014). In terms of economics, the distribution of direct or indirect tax burden between
buyers and sellers is known as incidence of the imposed tax.
Answer ii
Before imposing any tax, the impact of the proposed tax should be evaluated in terms of
supply, demand and their respective elasticity. This is studied in the microeconomic lesson-
containing concept of elasticity of demand and supply and incidence of taxation.
The main economic rationale behind imposition of any tax is to put some indirect
restriction on particular activity. More consumption of sugary drinks is bad for health and lead to
several health hazard (Case, Fair and Oster 2014). Therefore, government aims at reducing the
consumption of sugar through sugary drinks. To achieve this objective sugary drinks are taxed.
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Answer 2
Answer i
Figure 1: Tax on buyers of sugary drinks
(Source: as created by Author)
The figure above represents the market for sugar-sweetened drinks. MM shows the
demand curve without tax and NN shows that of the supply curve. Before tax, in the market Q1
amount drinks sold at price P1. The market equilibrium is at E. When a tax of the rate ‘t’ is
imposed on consumer then the immediate impact is on the market demand curve (Pindyck and
Rubinfeld 2015). The tax shifts the market demand curve by the amount of tax. M1M1. The new
equilibrium is set I. PS is the price obtained by the seller. Because of tax, buyers now have to a
high price of PB. Tax discourages both the buyers and sellers in the market and consequently
equilibrium quantity sold in the market reduced to QT from an earlier Q1. From the tax
government receives a tax revenue of the amount (PB - PS)*QT.
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Answer ii
Figure 2: Effect of a sugary tax in the sugar market
(Source: as created by the Author)
In sugary drinks, sugar is the key components. Any changes in market for such drinks
leads to a change in sugar market as well. Sugar and sugar drinks have a complementary relation.
For complementary goods, demand for the two goods move in the same direction. That means
increase in price of one good reduces its demand as well as the demand for its complementary
good (Perloff 2017). Figure 2 presents the scenario in the sugar market. As shown above, a tax
on sugar drinks reduces quantity sold in the market. As a lower quantity of sugary drinks is
produced, the main input demand that is sugar demand reduces. The decrease in demand leads to
a decline in price from P* to P1and decreases quantity in the market from Q* to Q1.
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Answer iii
Figure 3: Effect on non-sweetened, artificially sweetened and low sugar beverages
(Source: as created by the Author)
A tax on sugary drinks raises the cost to consumers of such drinks. Owing to a high price,
consumers of sugar drinks now attempts to substitute sugar-sweetened drinks with drinks that are
artificially sweetened, low sugared or non-sweetened. Therefore, demand of sugar substitute
drinks will increase (Hubbard et al. 2015). This is shown by the rightward shift in the market
demand curve of the substitute product from M0M0 to M1M1. As a result, these markets will
expand with an increase in price and quantity sold.
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Answer 3
Answer i
Own price elasticity of demand captures the percentage change in demand with respect to
a percentage change in own price. The elasticity measure is particularly important in determining
the extent of tax burden (Krugman et al. 2015). The estimated elasticity of sugar-sweetened
beverages is -0.9. That means when price of such drinks raises by 1% then its demand will be
reduced by 0.9%, which is close to 1. The government’s objective of levying tax on sugary
beverages is to reduce consumption of such beverages. When tax raises price of sugary drinks
then consumers will reduce 90% of their demand. This fulfills government’s objective of
consumption reduction of sugary beverages. As buyers are able to reduce their demand almost to
the extent of tax, most of the burden will be borne by suppliers. This discourages production of
sugary drinks. Hence, own price elasticity of sugary beverages of -0.9 make the imposed tax very
effective in reducing consumption and production.
Answer ii
As revealed by studies, sugary beverages are mostly consumed by consumer group
consisting of children, teenagers and low income household. Own price elasticity depends on a
number of factors. Income of the consumers’ group is one important factor affecting elastic
response of demand (Parkin and Bade 2015). Consumer having limited income generally have a
highly elastic demand. A rise in price means greater reduction in real income of this group. As a
result, they reduce their demand largely when price increases and try to use cheap substitute
product (Dixit 2014). Children and teenagers have income limited by their pocket money.
Therefore, when proposed tax raises price then their affordability for sugary beverages reduce
and so is the demand. Similar is the case for low income household. Because of low income,
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increase in sugar price make them more responsiveness and there will be considerable decline in
demand.
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References
Case, K.E., Fair, R.C. and Oster, S., 2014. Principles of Microeconomics. Pearson Higher Ed.
Dixit, A., 2014. Microeconomics: A very short introduction. OUP Oxford.
Hubbard, G., Garnett, A., Lewis, P. and O'Brien, T., 2015. Microeconomics. Pearson Australia.
Krugman, P., Wells, R., Au, I. and Parkinson, J., 2015. Microeconomics: Canadian Edition.
Macmillan Higher Education
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
Parkin, M. and Bade, R., 2015. Introduction to Microeconomics.
Perloff, J.M., 2017. Microeconomics: theory and applications with calculus. Pearson Higher Ed.
Pindyck, R.S. and Rubinfeld, D.L., 2015. Microeconomics; Eight Edition, Global Edition.
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