Economics Assignment: Sugar Tax Debate, Fiscal, and Monetary Policies

This economics assignment solution begins with a debate on sugar tax, presenting arguments for and against its implementation, considering demand elasticity and potential market impacts. Part II delves into Keynesian economics, explaining the concept of effective demand and the role of government intervention during economic downturns. It further explores automatic stabilizers and discretionary changes in fiscal policy, detailing how fiscal contractions can improve macroeconomic performance and reduce inflation. The assignment also contrasts fiscal and monetary policies, arguing for the effectiveness of monetary policy in triggering economic stimulus, while highlighting the risks associated with fiscal policy, such as consumer behavior, reduced private investment, and potential delays. The solution includes an appendix with elasticity data for various food types.

Part I: Sugar Tax
Arguing For:
The government should implement the tax on sugar intended to shift the consumption
of a healthier diet. People become obese and hence impose costs on health service and hence
the government should be more proactive than reactive and hence must play a key role to tax
sugar. Sugar is among the unhealthy foods and subsidise nutritious including the ones shown
in the table below (see appendix): Implementing the taxes/subsidies designed to encourage
healthy eating and/or discourage unhealthy eating is thus inevitable. The idea of sugar tax is
excellent because it will raise revenue and simultaneously make consumers to think twice
before eating or drinking unhealthy sugary foods thus minimizing obesity.
Arguing Against:
Demand is inelastic as seen by the above elasticities and hence sugar tax will be
ineffective and will never solve the problem of obesity. Thus, taxation will only take much
money from people in terms of tax revenue will never solve the primary intended purpose.
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The figure above indicates 3 potential means through which sugar tax shall impact the
market for soft drink. Both supply and demand curves shall shift to leftwards; the equilibrium
quantity will decrease whereas the equilibrium price might surge; decline or remain
unaffected demonstrated above by first, second and third diagrams from LHS.
Part II:
Question (a)
Keynes recognized the lack of effective demand and suggested government
intervention by postulating the simple idea. He held that if individual fail to spend
adequately, no one will spend (during Great Depression) but the government who should
spend because economy cannot automatically adjust. The simple idea is for the government
to spend where private sector will not as a fill-in stopgap.
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Question (b)
Automatic changes occur during recession in the fiscal position (budget
deficit/surplus) because of automatic stabilizers. Automatic stabilizers increase budget
deficits during recessions by enacting countercyclical policy without the delays associated
with legislative policy changes. These changes include corporate profits on profits which
plunge substantially during recessions; progress income tax whereby many individual fall
into lower tax-bracket or lack tax liability which thereby increasing the government budget
deficits. An instance of discretionary changes is a government military spending that
culminate in surged budget deficits.
Question (c)
The fiscal contractions leads to improved macroeconomic performance via wasteful
government programs/projects minimization which saves costs. The saved expenditure cost
can then be redirected to priority and useful services hence improving macroeconomic
performance. The contractionary fiscal policy reduces inflation due to minimal wasteful
spending. The indirect effect of reduced inflation is the creation of conducive environment
for doing business which transforms into hiked investment and hence better macroeconomic
performance.
Question (d)
Government used monetary policy to trigger economic stimulus effectively than fiscal
policy. The economic stimulus is the attempts by the government to financially stimulate the
economy. The monetary changes are effectively used to jumpstart the growth of economy in
presence of recession. The administration uses lower interest rates alongside quantitative
easing for instance when creating economic stimulus through stimulus package. Such a
package details the economic measures put together by the government to stimulate the
already wallowing economy. The resultant stimulus package will cause immediate
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reinvigoration of economy. It will also lead to the prevention and reversal of the recession.
These two effects are achieved by surging expenditure and employment in the country.
As stated above, the monetary policy-economic stimulus is effective and efficient than
the fiscal policy. This is because the fiscal policy stimulus spending has the risk of consumers
sometimes internalizing the government spending decisions in a way that offsets the current
measures of stimulus. Accordingly, consumers will end up spending much less in the present
in anticipation that the government will compel them to pay higher taxes to the budget
deficits triggered by fiscal policy spending.
The fiscal policy through government spending will decrease the private investment
due to government deficits spending. This is because there will be an increasing demand for
labour leading to an increase in wages which hurts the business profits. The deficit has to be
funded in the short-term by debt that will cause a marginal increase in the rates of interest.
Increased interest is costly for business to acquire financing essential for their individual
investment.
Also, fiscal policy through stimulus government spending could take place at the
wrong time as a result of delays in the identification as well as allocation of funds. The
central government is also less efficient at the allocation of capital to its most needful and
useful purpose which leads to wasteful projects with low return.
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Appendix
High or low calorie Food type Elasticity
High Fruit and vegetables -1.128
Low Fruit and vegetables -0.830
High Grain, pasta, bread -0.854
Low Grain, pasta, bread -0.292
High Sweets and sugary snacks -0.270
Low Sweets and sugary snacks -0.295
High Dairy products -0.1793
Low Dairy products -1.972
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