The Impacts of Implementing Sugar Tax on the Health of Australia
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Added on 2023/06/03
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This article analyzes the impacts of implementing sugar tax on the health of Australia. It includes graphs and analysis of the short-run and long-run effects of the tax on consumers and producers. The article concludes that sugar tax is more effective when imposed on the sellers’ side, rather than on the consumers’ side.
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Running Head: Sugar Tax The Impacts of Implementing Sugar Tax on the Health of Australia Student Name Institutional Affiliation Course/Number Instructor Name Due Date 675 words
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Sugar Tax2 The Impacts of Implementing Sugar Tax on the Health of Australia Introduction The consumption of sugary drinks is believed to be responsible for the increased obesity issues in many economies (Davey, 2018). It has raised the government’s cost of health and thus the policy makers are interested in ensuring that there is a shift from consuming sugary to non- sugary drinks (FitzSimons, 2018). Part a Graph: Sugar tax in the short-run PricePrice S + tS MC + t MCAVC + t AVC PtPt P*P* D Q*QuantityQnQ*Quantity Initially before the tax firms produced Q* units. The supply curves are almost vertical; inelastic to price changes, whereas the demand curve is flatter; elastic to price changes (Riley, 2018). In the short run, given the inelastic nature of supply to price changes, the marginal cost (Mc) for production will rise from MC to MC + t. Because the tax imposed is a per unit tax, the Average Variable Cost (AVC) will also rise to AVC + t (Pal, 2018). As a result, firms will cut production; from S to S + t curve. Quantity will fall to Qn from Q* and a price rise from P* to Pt. The shifts in S, AVC and MC curves is as represented by the arrows. Graph: Tax burden
Sugar Tax3 P S + t S Consumer’s Producer’sD QnQ*Q Producer’s burden is greater. The blue triangle represents a loss in deadweight (Tresch, 2015). Part b Graph: Sugar tax in the long-run PricePrice MC + t MCAVC + t AVC PtPtS + t P*P*S D Q*QuantityQnQ*Quantity In the long run, the supply curve will be horizontal (perfectly elastic). This unlike in the short run, producer’s surplus will be zero, and thus any change in price will be only reducing the consumer surplus (Gallego, 2017). Due to cost increment in the short run, firms will start making
Sugar Tax4 losses if they continue selling at price P*, some firms will exit the market given free entry and exit barriers in this market. In the long run, no profits nor losses will be made. Quantity will fall, price will remain at Pt since supply will fall to S + t. Part c Graph: Short run tax on consumers S + tS PricePrice MCAVC PtPt P*P* D Q*QuantityQnQ*Quantity Since tax will add to consumer prices, the movement will be along the demand curve. There will be a shortage in demand, and a price rise to Pt; suppliers will be supplying Qn units at price Pt. Firms will make economic profits (shaded area) since the AVC is below the price Pt. The AVC and MC does not change since only consumers carry the burden. Graph: Long run tax on consumers PricePrice MCAVC P*P*S D Q*QuantityQnQ*Quantity
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Sugar Tax5 The economic profit that firms get from selling at price Pt in the short run will attract other firms such that only normal profit will be made in the long run. Price restores back to P*. Firms would prefer the tax to be imposed on consumers because they have greater benefits that when imposed on them. Part d Price of sugaryD Drinks P1 P0 QoQ1Demand of sugar-free drinks The demand curve in this case is positively sloping as an indicator of cross-price substitution from one good to another. It is also assumed that the demand is inelastic (weak substitutes). In an elastic case, it would require for the price of sugary drinks to be raised at a higher magnitude in order to stimulate a bigger shift to the consumption of non-sugary drinks. Consider the bigger change in price from P0 to P1 and the resulting increase in the demand for sugar-free drinks from Q0 to Q1. Hence, price elasticity of demand is an important factor in the effectiveness of the sugar tax. It’s assumed that people will find it more economical to drink sugar-free drinks when the sugar tax is imposed. In the short-run, people may not respond quickly to shifting to sugar-free drinks. Conclusion Sugar tax cannot be considered an effective policy to solve health issues since the shift after its imposition is too small. In the short run, people will continue consuming nearly the same level. The sugar tax has been proved from this analysis to be more effective when imposed on the sellers’ side, rather than on the consumers’ side because sellers has to feel the squeeze in order for them to lower the supply of sugary drinks and shift to production of sugar-free drinks.
Sugar Tax6 References Davey, M. (2018). Sugar tax: why health experts want it but politicians and industry are resisting. Retrieved from https://www.theguardian.com/australia-news/2018/jan/10/sugar- tax-why-health-experts-want-it-but-politicians-and-industry-are-resisting. FitzSimons, P. (2018). Time to introduce a sugar tax for our children's sake. Retrieved from https://www.smh.com.au/national/time-to-introduce-a-sugar-tax-for-our-children-s-sake- 20180430-p4zchh.html. Gallego, L. (2017). Perfect competition II: Taxes. Retrieved from https://policonomics.com/lp- perfect-competition2-tax/. Pal, D. (2018). Short-Run and Long-Run Effects of a Tax (With Diagram). Retrieved from http://www.economicsdiscussion.net/perfectly-competitive-equilibrium/short-run-and- long-run-effects-of-a-tax-with-diagram/16372. Riley, G. (2018). Perfect Competition - Short Run Price and Output Equilibrium. Retrieved from https://www.tutor2u.net/economics/reference/perfect-competition-short-run-price-and- output-equilibrium. Tresch, W. (2015).Public finance: A normative theory. Amsterdam: Elsevier.