Question

Suppose Boston wants to reduce childhood obesity. As part of its plan, the city would impose a tax on sugary drinks like soda, Gatorade, etc because their consumption has been associated with childhood obesity, however, the tax would be applied statewide. The tax would be paid by suppliers. According to standard economic theory, how would the tax affect the market equilibrium price and quantity of soda sold in Boston? Do you think the tax would be effective in reducing childhood soda consumption in Boston? Would it be effective in reducing childhood obesity in Boston (assume that soda consumption does increase obesity)? Explain.

Answer 1

If tax is imposed on the sellers of sugary drinks then the seller will pass on the value of tax to the consumers in the form of higher prices. As per standard economic theory if tax is imposed on the supplier then supply curve will move to the left representing reduction in supply. the price that buyers pays will be more than what seller will recieve which is equal to amount of tax. Change in price for the buyer is more than the tax imposed. This is refered as incidence of tax. Generally most tax is borne by the conumers in the form of higher prices, if price of the sugary drinks increases then demand for soda will fall as per the law of demand. With price increase quantitiy demanded will fall. Market equiliibrum price is more than before and quantity demanded is less.

Elasticity of demand plays a important role in determining whether tax will affect the demand or not. If demand is elastic (ed >1)  for sugary drinks then tax increase will help in reducing the demad but if demand is inelastic (ed <1) then tax will not be that useful in reducing the demand.

Assuming soda to be elastic tax imposed will increases price and thus demand for soda will fall. since conumption of soda increases obesity then to some extent higher prices of soda will help in reducing obesity. But obesity is affected by many other factors like consumption of other fast food prouducts , unhealthy lifestyle. tax on soda will help to certain extent but will not elimnate the problem completely.