The Impacts of Implementing Sugar Tax on the Health of Australia

Running Head: Sugar Tax
The Impacts of Implementing Sugar Tax on the Health of Australia
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675 words

Sugar Tax 2
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

Sugar Tax 3
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