Analyzing the Economic Impact of Soda Tax: A Comparative Study

This report analyzes the economic implications of a soda tax, focusing on its impact on consumer and producer surplus, as well as the overall welfare effects. The analysis uses a supply and demand framework to illustrate how the tax shifts the equilibrium price and quantity of sugar-sweetened beverages. The report highlights that while a soda tax may reduce consumption, it also leads to a loss in both consumer and producer surplus, as well as creating deadweight loss, suggesting an overall reduction in social welfare. The report references a real-world case, the Seattle soda tax, and its effect on sales. Ultimately, the report concludes that the imposition of a soda tax is not beneficial because it leads to a decrease in both consumer and producer surplus, alongside causing a reduction in social welfare. The report includes a figure illustrating the changes in consumer and producer surplus and deadweight loss.

Running head: SODA TAX
Soda Tax
Name of the Student
Name of the University
Student ID

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Table of Contents
Answer.............................................................................................................................................2
Reference.........................................................................................................................................4

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Answer
Figure 1: Soda Tax
Source: (Created by the Author)
Before soda tax the equilibrium price and quantity of sugar-sweetened beverages was P*
and Q * respectively. Excess consumption of sugar-sweetened beverages lead to various chronic
and fatal health issues such as diabetes, heart disease, strokes and high blood pressure. Thus, it is
recommended to lower the consumption of such drinks. However, the government to reduce
consumption of sugar-sweetened drinks imposed soda tax. Due to imposition of such tax the
price of sugar-sweetened drinks increased from P* to P2. Because of price rise, the consumers
reduce their consumption and consequently demand reduced from Q* to Q2. The soda tax
successfully reduced the consumption of sugar-sweetened beverages (Taylor et al. 2016).
Contrarily, there is a down side to the soda tax. Due to imposition of tax, the burden of tax is
shared by both consumers and producers. As a result, both consumers and producers lose some
part of their surplus. In the figure, the loss in consumer surplus is given as yellow rectangle and
blue triangle whereas the loss of producer surplus is shown as orange rectangle and red triangle.

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Therefore, both of them are worse-off after imposition of tax. In addition to that, there is loss in
total surplus which is shown as blue and red triangle in the figure and is known as dead weight
loss (Balagtas and He 2019). Therefore, from the above discussion it can be commented that
imposition of soda tax cannot be supported because it leads to deprivation of both consumers and
producers and along with that causes loss in social welfare.

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Reference
Balagtas, J.V. and He, X., 2019. Spatial Competition and Effectiveness of Soda Tax: Evidence
from Berkeley and Philadelphia.
Taylor, R., Kaplan, S., Villas-Boas, S.B. and Jung, K., 2016. Soda wars: Effect of a soda tax
election on soda purchases.