Impact of Tax on Sugar Sweetened Beverages

Running head: ECONOMICS
Economics
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1ECONOMICS
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.

2ECONOMICS
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