Economics Report: Tax Imposition on Sugary Foods and Fiscal Policies

This report examines the government's decision-making process concerning the imposition of taxes on sugary foods and the appropriateness of fiscal policies. It begins by analyzing the elasticity of demand for sugary food stuffs and discusses how taxes alone may not be effective in changing consumer behavior due to inelastic demand. The report then explores the Keynesian idea of government spending stimulating private investment, and how fiscal policies, such as increased government spending and tax cuts, affect the government budget balance, particularly during recessions. It also addresses the issue of wasteful government spending and its impact on borrowing and interest rates. Finally, the report contrasts fiscal and monetary policies, emphasizing that monetary actions might be more effective in economies that heavily borrow to finance spending.

Running Head: Government’s Decision Making
Decision making on Tax Imposition on Sugary Foods and the Suitability of Fiscal Policies
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Government’s Decision Making 2
Decision making on Tax Imposition on Sugary Foods and the Suitability of Fiscal Policies
Question 1
Fig: Elasticity of demand for Sugary food stuffs
Price for
Sweets and
Sugary snacks St
Pt S*
P*
Inelastic demand curve
Qt Q* Quantity
A tax on sweets and sugary snacks can have a positive effect of changing the consumers’
behavior from unhealthy to healthy eating. If an assumption is made that the price of these food
stuffs before the tax imposition is P* and that a quantity level of Q*, a price increase to a price
with tax Pt causes the quantity level to fall to quantity with tax Qt. However, as it can be
observed from the diagram above, inelasticity of demand for this food stuffs is making the
quantity demanded to fall by a small margin after a big price rise. Thus, taxing this products does
not result in a significant behavioral change. Tax alone cannot be effective and I can argue
against it. However, a combination of this tax and subsidy could be effective since the money
raised through the imposed tax will be sufficient to subsidize the affordability of fruits and
vegetables and other food stuffs recommended for healthy eating. If the taxation is supplemented
by the subsidy, then I would vote for it. The tax imposition therefore has to be higher to impact
the consumers’ behavior; a small tax imposition will result in no change owing to the issue of
inelasticity.

Government’s Decision Making 3
Question 2
Question 2 Part a
The simple idea put down by Keynes has been argued for by many economists and
governments have embraced this idea. The simple idea is that increasing the government
spending could indirectly stimulate the private investment. The process is as follows; the
government spending goes up to investments that creates more jobs for the citizens. With the
availability of many jobs, the economy’s income level expands stimulating an increase in
demand. Since the supply level has not changed, the price level goes up stimulating the
producers to supply more so as to enjoy better profits. At the bottom line, the production level in
the economy is stimulated
Question 2 Part b
During a recession, the change in the fiscal position is that the government budget
balance becomes a deficit due to the implementation of discretionary fiscal policies. The
government has a crucial role of ensuring that they is a significant level of growth at any given
time. During a recession, the fiscal policies employed include the raise in government spending
and cutting of the taxes. Any of these two policies contributes to the deficit. Tax is the major
source of revenue for the government and thus when its cut, revenue falls. Increasing
government spending again causes the deficit because already many economies operates at a
deficit and supplement the increase in spending from borrowing.
Question 2 Part c
Wasteful spending by the government is consuming much funds that could otherwise be
used productively. This explains why the government need to borrow so as to facilitate its
increased spending. It has been noted that increased government borrowing results in an
increased interest rate which discourages real investment. Thus, if the government directed its
spending only to important projects and eliminating the spending on wasteful projects, it would
save more of its revenue and reduce its budget deficit. As a result, the interest rate would fall and
the investors will be stimulated to invest more. The government will be in a good position to
raise spending in the future is need arises.
Question 2 Part d
The creation of economic stimulus through monetary policy could be by increasing the
money supply or reduction in the central banks interest rate. Money supply is increase through;

Government’s Decision Making 4
cut in reserve ration requirement, open market operations and decreasing short term interest rate.
Makin argument is that fiscal policy is not effective for an economy that borrows heavily to
finance its spending as it creates risks of falling credit worthiness. For such an economy
therefore, Makin noted that the most effective policy is that of monetary actions and he argued
for absence of need for a fiscal stimulus is such an economy.
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