ATMC BUS502 Assessment Task 2: Soda Tax and Market Analysis

This assignment analyzes the economic effects of a soda tax based on an article from The Balance. The student uses supply and demand diagrams to illustrate how the tax impacts consumers, including changes in price and quantity demanded. The analysis covers shifts in supply and demand curves, leading to changes in equilibrium price and quantity. Furthermore, the assignment examines government revenues, consumer surplus, producer surplus, and deadweight loss resulting from the tax. The student also explores the concept of elasticity in relation to the soda tax, explaining how inelastic demand can limit the tax's effectiveness in reducing consumption, and illustrates this with diagrams. The assignment demonstrates an understanding of economic principles and their application to real-world scenarios, such as the effects of a tax on sugary drinks.

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ATMC BUS502 Principles of Economics for Accountants
Assessment Task 2 – Responses to articles
Article 2: DUE via Safe Assign 6pm Saturday 12th May
Full Name:
Student number:
Tutor’s name:
Article Title:
“What is the Soda Tax and which cities have one”by Beverly Birdfrom The Balance from
25th November 2018. Available at:
https://www.thebalance.com/soda-tax-and-which-cities-have-one-4151209
Instructions:
Access the article at the URL given above and read it carefully. Answer the questions and
complete the diagrams in the spaces provided below. Use full sentences. If you use any
references, please list at least the URL of your source. Possible total for this assessment task is
15 marks.

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Question 1
According to the article, ‘the tax should reduce consumer demand for unhealthy food and
beverages’.Use the supply and demand diagram below to illustrate and explain how the
imposition of a tax affect consumers.
It is critical to note that the soda tax has been imposed on the sellers and thereby the cost
would increase for them. The increase cost would tend to impact the supply curve which
would shift upwards as has been illustrated in the graph attached. However, the
corresponding demand for the soda drinks would not alter and hence the demand curve
remains constant.
The shifting of the supply curve leads to a change in the equilibrium position for the soda
market whereby the prices tend to increase (From P* to P1) and the quantity consumed of
these products tends to decline (From Q* to Q1). This theoretically would enable lower
consumption of these drinks and hence lower the negative externality associated with
their consumption. From the consumer perspective, the imposition of tax would lead to
higher prices which would significant impact on the low income group.
.

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Question 2
The article claims that “resulting revenues are an important part of the equation”. Use the
demand and supply diagram below to illustrate and explain the Government revenues and the
changes in consumer surplus and producer surplus, and the dead weight loss, due to an
imposition of a tax.
The soda tax imposition has led to modifications in the various surpluses as outlined
below.
Producer surplus – This has decreased since the price after tax that producers get has been
reduced from P* to P2.
Reduction in producer surplus = (D+E+F) – (F) = D+E
Consumer surplus – This has also witnessed a decline as price paid by the consumers to
buy soda drinks has increased from P* to P1.
Reduction in consumer surplus = (A+B+C) – (A) =B+C
Increase in government revenues = Owing to imposition of taxes, the government is
drawing revenues which earlier were absent.
Increase in government revenues = B+E
Owing to loss of efficiency, part of the decline in consumer surplus and producer surplus
contributes to deadweight loss which is (C+D).
Question 3

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According to the article residents of Philadelphia and Cook County “are not drinking less soda”
following the imposition ofthe tax on sugary drinks.
A. Explain in your own words what this means in terms of elasticity.
Ideally, if the demand for a given product is elastic, then it would imply that
the percentage change in quantity demanded would be quite significant even if
a small change in price tends to occur. In relation to the demand for soda, it
would be appropriate to conclude that the demand is inelastic. This is because
even though after the soda tax prices have increased but as witnessed in places
such as Philadelphia and Cook County, the consumption of the sugary drinks has not
declined significantly.
B. Complete the diagrams below to explain and illustrate the effect of the imposition of a
tax on sugary drinks onequilibrium price and quantity in two cases: when the elasticity
of demand for sugary drinks is
I. relatively inelastic.
II. relatively elastic.
The figure on the left illustrates inelastic demand. In this case, the %change in quantity would be
lower than the % change in price thereby the soda tax having limited impact on the consumption
patterns of the people. A starkly different situation is visible on the right as the demand is elastic
owing to which a small change in price is able to bring about a significant change in quantity which
augers well for the soda tax as it would be effective in lowering consumption of sugary drinks.