MAE101 Assignment: Economic Impact of Sugar Tax in Australia

This assignment analyzes the economic implications of a sugar tax in Australia, focusing on microeconomic concepts. The student examines the own price elasticity of demand for Sugar Sweetened Beverages (SSB), differentiating between the overall economy and low-income households, and discusses factors influencing price responsiveness. The analysis includes the calculation of cross-price elasticity between SSB and bottled water. The assignment further explores market equilibrium before and after the imposition of a sugar tax, illustrating the effects with diagrams. It compares the impact of a sugar tax with that of an awareness campaign, considering changes in consumption, price, and government revenue. The student also discusses alternative policies and the role of SSB manufacturers, offering a comprehensive view of the issue. The assignment concludes by highlighting unintended consequences in a supermarket setting related to sugary products.

Running head: SUGAR TAX IN AUSTRALIA
Sugar Tax in Australia
Name of the Student
Name of the University
Student ID

1SUGAR TAX IN AUSTRALIA
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................7
Answer 3..........................................................................................................................................9
Reference.......................................................................................................................................10

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Answer 1
(a) (i) Own price elasticity of demand for the economy on average (OPEDE)
OPEDE= Percentage change∈demand
Percentage change ∈ price
¿ , OPED E= 7.6
10
¿ , OPEDE=0.76
(ii) Own price elasticity of demand for low income households (OPEDLIH)
OPEDLIH= Percentage change ∈demand
Percentage change∈price
¿ , OPEDLIH= 11.7
10
¿ , OPEDLIH=1.17
(b) Own price elasticity of demand for the economy on average is 0.76, which is lower than 1. It
means that demand for Sugar Sweetened Beverages (SSB) in case of economy on average is
relatively price inelastic (Jawad et al. 2018). However, OPED for low income households is
1.17, which is greater than 1. Therefore, demand for SSB in case of low income household is
relatively price elastic. Hence, it can be said that, low income households are more responsive to
the tax on SSB.
(c) Responsiveness to a price increases depends on various factors and they are
 Income level: Higher the income of individuals lower will be the responsiveness to price
increase and vice versa.

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 Nature of commodity: Responsiveness to price depends on the type of commodity that is
if necessary responsiveness would be low and if luxury then responsive would be high.
There are other kind of commodities such as normal, giffen and demerit.
 Availability of substitutes: Goods with more number of substitutes have more responsive
to price than the goods that have no or low number of substitutes (Lee, Fox and Nayga Jr
2019).
 Price: Responsiveness of price also depends on price of the product. It means that if the
price of a product is very high then responsive to it increase in price would be high too
and vice versa.
 Number of uses: Products with more number of uses have less responsive to price
increase in comparison to product with less number or single use.
 Delay in consumption: Consumption of products that can be delayed for longer period
have more responsiveness to price increase in comparison to the consumption of goods
that cannot be delayed much.
 Habit: Goods that become necessary due to habit become less responsive to increase in
price.
 Time: Time plays a crucial role in responsiveness to price increase. Greater the time
responsiveness to price increase rises.
 Expenditure share: Higher the expenditure share of a product, higher its responsiveness to
price increase.
The difference found in parts (a) and (b) is that for low income households OPED is higher than
Mexican economy as a whole. Thus, responsiveness of low income households to the increase in
price of SSB is higher than the economy on average. This has happened due to the factors that

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determine responsiveness to a price increase (Loi and Le Ng 2018). The factors that acted in the
case are income, time, habit, availability of substitute, nature of commodity and price.
(d) Cross price elasticity of demand between SSB and bottled water is given by
Cross price elasticity fo demand= Percentage change ∈demand for bottled water
Percentage change∈ price of SSB
¿ , Cross price elasticity fo demand= 2.1
10
¿ , Cross price elasticity fo demand=0.21
The cross price elasticity of demand between SSB and bottle water is 0.21. It means that
with 1% increase in price of SSB causes demand for bottled water to increase by 0.21%.
Therefore, cross price elasticity of demand measures the responsiveness of demand for a product
due to change in its substitute’s price (Graham 2019).
(e)
Figure 1: SSB market
equilibrium before tax
Source: (Crated by the Author)

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Figure 1 shows the market demand and supply equilibrium in SSB market in Mexico. In
the figure, D is market demand curve and S is market supply curve for SSB. Additionally, P1 and
Q1 are the equilibrium price and quantity of the SSB market respectively (Miller et al. 2019). It
can be seen in the diagram that the market demand curve is slightly steeper because in part (a)
and (b) it has been found that the demand for SSB is relatively price inelastic in case of the
Mexican economy as a whole.
(f)
Figure 2: SSB market
after tax
Source: (Created by the Author)
After the imposition of tax by the government, the price for consumers increases from P1
to P2. However, the price received by the produces reduced to P3. This happens because the tax
burden is shared by both producers and consumers (Allcot, Lockwood and Taubinsky 2019).
Since, the price of consumers has increased from P1 to P2 the quantity demanded has decreased
from Q1 to Q2. Therefore, Q2 in the figure represents the quantity of SSB consumed after

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imposition of tax. Tax revenue that government earns after imposition of tax on SSB is given by
the yellow shaded region in figure 2.
(g) (i)
Figure 3: SSB market
after awareness campaign
Source: (Created by the Author)
The awareness campaign would make the consumers about the harmful effects of
drinking SSB such as diabetes and obesity (Popkin and Hawkes 2016). Therefore, with increased
awareness there will a drop in demand of SSB causing shift in market demand curve from D to
D1 as shown in figure 3. After the shift of demand curve to D1, the equilibrium price and
quantity both reduced to P4 and Q3 respectively.
(ii) The fall in consumption of SSB due to awareness campaign and tax is a bit difficult to
compare as it is not possible to assess the amount of fall in quantity consumed after awareness
campaign (Hagmann, Siegrist and Hartmann 2018). However, in the case of tax there is no

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change in demand but fall in quantity demanded due to increase in price of SSB, it means that
with fall in price the quantity demanded might increase. Conversely, in the case of awareness
campaign there is fall in demand that causes the demand curve to shift left (Morley et al. 2018).
It means that awareness campaign caused the market to contract. Assuming that even if the fall
consumption is same, that is (Q1-Q2) = (Q1-Q3), the price of SSB paid by the consumer is lower
than in the case of tax. Therefore, there is no tax burden on consumers and producers.
Additionally, there is no tax revenue for the government under awareness campaign.
Moreover, awareness campaign will have equal impact on both the low income
households and Mexican economy as a whole in case of SSB consumption unlike tax (Bleakley
et al. 2018). This happens because there is no influence of factors that determines responsiveness
to a price increase. In case of awareness fall in consumption of SSB is completely due to self-
concern generated owing to health awareness.
(iii) A combination of both the awareness campaign and tax on SSB will have more impact on
the consumption of SSB (Ma et al. 2016). The consumption of SSB will fall below Q2 or Q3 and
price received by the producers will fall below P3 or P4. However, there will be no significant
change in the government revenue since the tax burden of producers increase in this case.
Answer 2
Sugar Sweetened Beverages (SSB) has become a national concern in Australia. The
continuous increase in consumption of SSB has increased the number of obese people in the
country and along with the cases of Type 2 diabetes has increased in the country drastically
(Harray et al. 2017). It is argued that over consumption of sugar is causing diabetes which
impacts the eye sight (Vassey 2020). The person suffering from severe diabetes has high chance

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of getting vision impairment. Thus, in many country such as Mexico has already imposed sugar
tax. It is argued that the Mexico government is successful in reducing consumption of SSB by
imposing tax. They imposed a tax that increased the price of SSBs by 10% and due to that,
demand fell by more than 7%. Thus, many experts in Australia argue that imposing sugar tax
will be ideal to reduce the consumption of SSB in the country (Lloyd and MacLaren 2019). The
tax would increase the price of the SSBs and due to that, the consumers will reduce the
consumption. However, this policy of taxing SSB in order to reduce their consumption is
questioned by many because it is argued that consuming SSB provides pleasure to the consumers
taxing would reduce pleasure and thereby reduces welfare at least in the cases of poor. Some
believe that aggressive advertisement is one of the causes of rise in consumption of SSBs (Choi
et al. 2017). Thus, the government should bring strict regulation top restrict such aggressive
advertisement to encourage consumption of SSB. Experts who argue for imposition of tax on
sugar gave the notion that since sugar is not an addictive product like cigarette or tobacco the
impact of tax on sugar will be much better. Imposition of tax on sugar may reduce the
consumption of SSB but it puts burden on consumers and producers. Both of them have to thus
worse off due to imposition of sugar tax. Thus, even though it helps in reduction of consumption
of SSB and improves public health. However, tax burden lowers the beneficial impact the policy.
Thus, instead of imposing sugar tax alternative policies can be used. Policies such as conducting
awareness programmes, asking SSB manufacturers to reduce the amount of sugar in the drinks.
Conducting awareness programmes would make the consumers aware of the harmful effects of
consuming sugar or sugar based products. Sugar is present in every foods that is consumed and
thus it is necessary to increase more awareness. Awareness programme does not imposes tax
burden on consumers and the producers. Conversely, there is problem with awareness

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programmes and that it takes long time to make any significant impact. Hence, it can be said that
both the policies have their own drawback. It is said that SSB manufacturers encourages
consumption of SSBs since they are in the market to make more profits and it is completely
reasonable unless and until they are not using unlawful means to increase consumptions of SSB.
On the other hand, the government of Australia does not support taxing consumption of SSB
since they are not addictive product like cigarette. With increasing concern of obesity and
diabetes in the country and debates about policies to control consumption of SSB, the one of
biggest source of sugar, the SSB manufactures are taking measures in order to keep their market
growing by reducing sugar content in the SSB products. They are also launching new products
that will be free of sugars and thereby the sugar consumption of people of the country can be
reduced significantly without controlling the consumption of SSB by imposition of tax or any
other similar policies. All the measures are capable of reducing the consumption of SSB or lower
sugar intake. Hence, further thought is needed in this context of lowering consumption of SSB to
control excessive sugar intake.
Answer 3
The supermarket in Abisko is filled with sugary products such as sweets, SSB and
chocolates. The town is 1 hour 20 minutes from Narvik, a place in Norway. Therefore, the entire
population of the town is dependent on the supplies of the super market. Abisko is not far from
from Norway and it means that the town is in border nearby area. Hence, it is difficult for the
super market to get its products regularly. Again it is the last super market not only in area but
before the Norway and Sweden border, Therefore, the super market does not only serve people
of Abisko town but also the flying consumers who travel from Sweden to Norway or the
opposite. Thus, in order to meet the market demand there is more number of sugary products in

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the supermarket (Boudon 2016). Hence, this is an example of unintended consequences since it
encourages the consumption of sugary products by selling more of such products and increasing
the chance of obesity and Type 2 diabetes.

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Reference
Allcott, H., Lockwood, B.B. and Taubinsky, D., 2019. Should we tax sugar-sweetened
beverages? An overview of theory and evidence. Journal of Economic Perspectives, 33(3),
pp.202-27.
Bleakley, A., Jordan, A., Mallya, G., Hennessy, M. and Piotrowski, J.T., 2018. Do you know
what your kids are drinking? Evaluation of a media campaign to reduce consumption of sugar-
sweetened beverages. American Journal of Health Promotion, 32(6), pp.1409-1416.
Boudon, R., 2016. The unintended consequences of social action. Springer.
Choi, J.Y., Park, M.N., Kim, C.S., Lee, Y.K., Choi, E.Y., Chun, W.Y. and Shin, D.M., 2017.
Long-term consumption of sugar-sweetened beverage during the growth period promotes social
aggression in adult mice with proinflammatory responses in the brain. Scientific reports, 7,
p.45693.
Graham, N.J., 2019. An exploration of own and cross-price elasticity of demand for residential
heating in the Fairbanks North Star Borough (Doctoral dissertation).
Hagmann, D., Siegrist, M. and Hartmann, C., 2018. Taxes, labels, or nudges? Public acceptance
of various interventions designed to reduce sugar intake. Food policy, 79, pp.156-165.
Harray, A.J., Boushey, C.J., Pollard, C.M., Panizza, C.E., Delp, E.J., Dhaliwal, S.S. and Kerr,
D.A., 2017. Perception v. actual intakes of junk food and sugar-sweetened beverages in
Australian young adults: assessed using the mobile food record. Public health nutrition, 20(13),
pp.2300-2307.