Economic Impacts of Implementing Sugar Tax on Health of Australia

This report provides an economic analysis of the impacts of implementing a sugar tax on the health of Australia. It begins by introducing the context of rising obesity rates and the government's interest in shifting consumption from sugary to non-sugary drinks. The analysis includes graphical represent...Read More

Running Head: Sugar Tax
The Impacts of Implementing Sugar Tax on the Health of Australia
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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
Price Price
S + t S
MC + t
MC AVC + t
AVC
Pt Pt
P* P*
D
Q* Quantity Qn Q* 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

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P
S + t
S
Consumer’s
Producer’s D
Qn Q* 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
Price Price
MC + t
MC AVC + t
AVC
Pt Pt S + t
P* P* S
D
Q* Quantity Qn Q* 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

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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 + t S
Price Price
MC AVC
Pt Pt
P* P*
D
Q* Quantity Qn Q* 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
Price Price
MC AVC
P* P* S
D
Q* Quantity Qn Q* Quantity

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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 sugary D
Drinks
P1
P0
Qo Q1 Demand 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.

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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.