Impact of Tax on Sugar Sweetened Beverages

This essay evaluates the likely consequences of implementing a tax on sugary beverages and discusses alternative policies to reduce consumption. It also examines the effectiveness of such a tax in reducing consumption and the potential drawbacks. The essay concludes by discussing the importance of health awareness campaigns in promoting a healthier lifestyle.

Running head: ECONOMICS
Economics
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Introduction
Today type II diabetes has become a growing concern related to health of people both
in developing and developed nations (Brownell et al. 2009). In 2015, nearly 1.6 million
people died because of this disease. In addition to food, people intake sugar from different
sugar sweetened drinks. Sugar from different can quickly enter the body and can overload
pancreas and the liver resulting in heart diseases and diabetes. Studies reveal that intake of
one or two sugary drinks in a day can increase the risk of diabetes by 26 percent. Heart
diseases and obesity are also growing concern globally. Too much intake of sugar has long-
term consequences for heart (Duckett and Swerissen 2016). Consumption of drinks with
added sugars is positively related with increased weight and obesity. In response to growing
health concern arising from over consumption of sugar sweetened beverages, government of
different nations have taken measures to restrict consumption. One such policy is
implementation of heavy taxes on sugar-sweetened beverages. The essay evaluates likely
consequences of such a tax on sugary beverages.
Evaluation of tax on sugar sweetened beverages
Imposition of tax on sugary drinks reduces the benefit from selling the sugary drinks.
Because of the imposed tax, sellers of sugar-sweetened beverages have to increase the price
charged for the offered drinks. Price paid by consumers’ increases from the equilibrium price.
The sellers themselves pay the rest of the tax (Ortun, Lopez-Valcarcel and Pinilla 2016). This
reduces the effective price of tax that the sellers receive. The burden of tax on the consumers
makes purchase of sugary drinks more expensive for the buyers. They now have to spend a
higher proportion of their income on sugary drinks to purchase the same amount of drinks.
This discourages consumers to purchase sugary drinks and reduces equilibrium quantity of
sugary drinks sold in the market (Sharma et al. 2014). The tax burden thus is shared between
the buyers and sellers. The figure below evaluates impact of a tax on sugary drinks using a
demand-supply model.

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Figure 1: Effect of a tax on
Demand of sugary drinks is given by the downward sloping curve DD. The state of
supply of sugar drink is shown by the upward sloping curve SS. Equilibrium in the market
occurs at the point E. Equilibrium price in the market in the market is obtained as P* and
equilibrium quantity in the market is obtained as Q*. Now suppose, government of country A
imposes a tax on sugar-sweetened beverages. The imposition of tax shifts the supply of
upward by the amount of tax (Baumol and Blinder 2015). With shift in the supply curve, the
equilibrium is achieved at E1. Buyers now pay a higher price of PB. The sellers receive a
lower effective price of PS. After the tax, the equilibrium quantity sold in the market reduces
from Q* to Q1. This shows how a proposed tax on sugar drinks reduces the sales of sugar-
sweetened beverages.
Elasticity of demand for sugar-sweetened beverages
Price elasticity of demand refers to the extent of change in quantity demanded of a
commodity in response to the corresponding change in price of the good (Hill and Schiller
2015). In case of elastic demand, proportionate change in demand is larger than Studies show
there is a large variability in price elasticity of demand across the world. The price elasticity
of demand varies in the range between -0.6 to -1.3. This means for 10 percent increase in
price of SSBs demand for SSB decreases between 6 percent and 13%. The best point estimate
for elasticity is -0.9. The range of elasticity generally found to be around -0.7 or -0.8. A 10
percent increase in price therefore reduces consumption of such sugary beverages by 7 to 8

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percent. This implies a general inelastic demand for sugar sweetened beverages. One reason
for inelastic demand for sugar is that taste of sugar is generally addictive and therefore, habits
are difficult to break. For this reason, consumers may simply choose to spend more on these.
Alternative policy to tax
An alternative policy of taxing sugary drink is to impose a binding price floor in the
market. This refers to the policy setting a minimum selling price of sugar sweetened
beverages. The sugary drinks cannot be sold at a price lower than the set price. The policy
aims to prevent sale of sugary drinks at a very cheap price to the society (Colchero et al.
2015). The expectation is that higher price will discourage drinking of sugar sweetened
beverages, improve health condition and makes people to pay a price which is equal to social
cost.
Figure 2: Price floor policy to reduce sugar consumption
The advantages of minimum price policy include it lowers overconsumption of sugary
drinks, discourage low income household to intake excessive drinks and reduces health care
cost (Bonilla-Chacin et al. 2016). This policy is criticized on the ground that it is regressive
as low income household has to pay higher proportion of income and can encourage black
marketing of such drinks.
Another alternative and effective policy for reducing consumption of sugary drinks is
health awareness campaign. Education has an important role to play for choice of a healthier

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life style (Opc.org.au 2018). Investment in sports resources especially for children and young
adult might prove effective in developing a healthy lifestyle.
Effectiveness of tax in reducing consumption of sugar-sweetened beverages
One obvious advantage of imposing tax on SSBs is that such taxes are generally easy
to define and hence, can be implemented easily. This offers government an easier way to
raise revenue through tax. The extent to which proposed tax reduces consumption of sugar
sweetened beverages that depends on relative elasticity of demand. In case demand is
relatively less elastic than supply, the imposed tax imposes a greater burden on buyers
(niassembly.gov.uk 2015). As buyers are unable to adjust their demand, much they have to
bear a higher tax burden. Opposite is the case if demand is relative elastic. In this situation, in
response to higher price because of the imposed tax buyers reduce their demand to a large
extent. In this case, the policy of taxation to reduce the consumption of sugar sweetened
beverages is more successful.
The policy of taxation to reduce consumption of sugary drinks is often criticized by
considering such a policy as regressive and unfair. Tax on sugary drinks is considered as
regressive as people belonging to lower income group consume such beverages
disproportionately (Bonnet and Requillart, 2016) As opposed to this there may be a higher
gain in health condition from the imposed duty on SSB as poor people are generally more
sensitive for a given change in price.
It is however difficult to predict whether a given tax effectively reduces consumption
of sugary beverages and reduce incidence of health hazards resulted from excessive
consumption of sugary drinks. This depends on how the consumers may respond to the price
change caused from the proposed SSB tax. It might be the case that several other goods and
beverages are consumed as substitute to sugar (Colchero et al. 2016). Therefore, the calorie
intake from sugary beverages may not reduce to the targeted level. The implementation of a
targeted tax thus may be an ineffective policy. As proposed by UNESDA, taxing unhealthy
products depends on two specific assumptions. First, taxes will be directly translated into a
price increase. Second, consumers will recognize the price increase. In case of sugar
sweetened beverages both these assumptions are unlikely to be satisfied. The pricing
mechanism for soft drink is a complex process. The shelf price and continuous promotion of
prices vary between regions, outlet, and seasons and even across the supermarkets (Ribaudo

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and Shortle 2011). The discount offered in the retail outlet implies that proposed tax easily be
concealed or absorbed. Consumers thus face difficulty in determining the nominal price.
Studies conducted in Australia, United States and United Kingdom reveal that despite
falling consumption of sugar the obesity rates are continued to increase (Schwendicke and
Stolpe 2017) This raises doubt over the policy of tax targeting only sugar.
Figure 3: Tax and deadweight loss
Any proposed tax however has an obvious effect of misallocation of resources. As tax
distorts the market outcome, there is an inefficiency in resource allocation. The deadweight
loss arises where there is a decline in total economic surplus as the market is not positioned at
the competitive equilibrium (Baumol and Blinder 2015) The deadweight loss is seen by the
area A + B. The area A represents portion of loss in the consumer loss and area B shows the
area of loss in the producer surplus. The area A + B show the excess burden of tax and
resulted inefficiency.
Conclusion
Over consumption of sugar sweetened beverages and resulted health hazards have
now become a growing concern all over the world. In order to address this issue, government
of different countries have adapted a policy to impose tax on sugary beverages. The direct
effect of such a tax is to increase the price of sugary drinks and lowers the consumption. The

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extent to which consumption of sugary drinks reduces that depends on the relative elasticity
of demand. Because of addictive tastes, demand for sugary drinks are mostly price inelastic in
nature. This makes taxation policy a less effective one. The proposed policy of taxing sugary
drinks is also criticized as an unfair and regressive practice. The alternative policy might be
setting a price floor or increasing health awareness among people.

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