Economic Principles (ECON7200) Week 3 Assignment: Sugar Tax Analysis

This assignment solution addresses the ECON7200 Economic Principles Week 3 assignment, specifically focusing on Part 3.1 of the Empirical Project 3, which involves measuring the effect of a sugar tax on Sugar Sweetened Beverages (SSBs). The solution analyzes the primary objective of SSB taxes, which is to lower consumption, and discusses the importance of studying the tax's impact on price to achieve this goal. It explores price elasticity of demand, distinguishing between elastic and inelastic scenarios and how they affect the tax burden passed on to consumers. The assignment also examines the regressive nature of SSB taxation and its fairness implications, considering the potential for affordability issues, and discusses the intervention with individual freedom in relation to food choices. The solution references relevant literature and provides a comprehensive understanding of the economic principles involved in sugar tax analysis.

ECONOMIC PRINCIPLES
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ECONOMIC PRINCIPLES
a) It is noteworthy that the primary objective of tax on Sugar Sweetened Beverages (SSB’s)
is not to act as a source of revenue for the government but to act as a means to ensure the
consumption of these products is lowered. In this regards, it is imperative that the impact
of the tax on the price needs to be studied so as to ensure that the primary objective of
improving the beverage choices of consumers is achieved. If the price is not increased,
then the consumption of SSB would not be altered and the objective of imposing the tax at
the first place would not be met (Mankiw, 2014).
Even when the tax is imposed, it is possible that the price increase in the SSB for the
consumers would not be lesser than the actual tax imposed. This is because the producers are
not in a position to pass 100% of the tax increase to the consumers and hence pass only
partial tax burden. The extent of the tax burden passed on would depend on the price
elasticity of demand for the underlying product. In case of the underlying product being price
elastic, the demand from consumers may be highly sensitive to price and therefore only a
marginal tax increase is passed on to the consumers. In case of product demand being
inelastic, a comparatively larger tax burden is passed to the consumers (Krugman & Wells,
2013).
b) Elasticity plays a vital role with regards to change in quantity sold witnessed when there is
change in price. The demand for a good may be elastic or inelastic based on various
factors such as nature of goods, available of cheaper alternatives and contribution of
budget (Nicholson & Snyder, 2015). With regards to SSB, it is pivotal to note that there
are a significant number of alternatives in the form of non-sweetened beverages coupled
with water. Besides, having comparable price with SSB, these alternative products also are
less harmful to health. As a result, it is fair to conclude that the demand of SSB would be
price elastic (Mankiw, 2014).
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ECONOMIC PRINCIPLES
As a result, the price elasticity of demand for most of the SSB would exceed 1. This would
imply that the percentage change in consumer demand would be higher than the percentage
change in price of SSB. This can explain the success of soda tax in Berkeley where demand
of taxed SSBs witnessed decline in sales by 9.6% (Global Food Research Program, 2018). If
SSBs had inelastic demand, then the success of soda tax would have been limited as is
apparent in case of alcohol and tobacco related tax (Krugman & Wells, 2013).
c) A key issue with regards to taxation on SSB is that it is regressive in nature considering
that the same amount of tax is paid by both the poor and rich but results in higher taxation
burden on the poor as a % of their income. Another issue relates to the fairness
considering that after the taxation, there would be affordability issues since SSB might not
be able to consume the same to that extent. As a result, it is possible that the decline in the
consumption of SSB is more concentrated amongst the poor people as compared to the
rich. This may result in limited success of SSB (Mankiw, 2014). Further, the imposition of
soda tax also intervenes with the individual freedom in relation to food choices where it is
more advisable that the government makes it mandatory to carry a health warning rather
than imposing a tax (Nicholson & Snyder, 2015).
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ECONOMIC PRINCIPLES
References
Global Food Research Program (2018) Berkeley SSB Tax, Retrieved from
http://globalfoodresearchprogram.web.unc.edu/research-in-the-united-states/u-s-
policy-evaluations/berkeley-ssb-tax/
Krugman, P. & Wells, R. (2013).Microeconomics (2nded.). London: Worth Publishers.
Mankiw, G. (2014) Microeconomics (6thed.). London: Worth Publishers.
Nicholson, W. & Snyder, C. (2015).Fundamentals of Microeconomics (11thed.). New York:
Cengage Learning.
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