Question

1. Read the following article excerpt: Sweetened-beverage sales in Seattle dropped 30% after soda tax, new study says The Columbian https://www.columbian.com/news/2020/feb/23/sweetened-beverage-sales-in-seattle-dropped-30- after-soda-tax-new-study-says/

By Daniel Beekman, The Seattle Times Published: February 23, 2020, 1:45pm

Sales of sugar-sweetened beverages at stores in Seattle dropped about 30.5% in the months after the city adopted a tax on such beverages, says a new study that also looked at sales at stores in Portland, which has no such tax. Sales in Portland declined only 10.5%, suggesting sales in Seattle dropped much more than they would have without a tax, according to the peer-reviewed study by University of Illinois at Chicago researchers.

The study’s results are the first to measure the impact of Seattle’s tax on beverage sales in the city, and they may bolster claims by supporters that the controversial policy is working as intended.

“From a public health perspective, this is good,” said Jay Krieger, a University of Washington professor who heads the nonprofit Healthy Food America. “People are purchasing less sugary drinks, and we know that sugary drinks are associated with heart disease, diabetes, high blood pressure and strokes.” Seattle’s tax of 1.75 cents per fluid ounce, which took effect on Jan. 1, 2018, is charged to distributors of sugar-sweetened beverages.

Distributors can pass the tax on to stores, and stores to consumers. Proponents said the tax would reduce soda sales and raise money for health and education programs.

Your task 1: Explain, with the aid of a diagram, how a soda tax such as the one described above would impact consumers, producers and society more generally.

Your task 2: Comment on whether or not you support such a tax and why.

Answer 1

The diagram can be drawn as shown in the figure below. The supply and demand curves before the tax are D and S, which establish the equilibruim price at P1 and quantity at Q1. Once the tax is imposed, in this case it has the same effect as an increase in the price for the consumers, and hence the supply curve will shift to the left from S to S+T. As a result, the new equilibrium price and quantity will be P2 and Q2 respectively. We can see that the consumer surplus reduces from P1AB to P2AE, and the producer surplus reduces from CP1B to CP3F. The price consumers now pay is P2 and the price sellers now receive is P3. The tax revenue is P1P2EF and the deadweight loss to the society is FEB.

I do not support this tax, because it is imposed on one of the most regular requirements of daily consumers and it is a basic commodity. In addition, the tax revenue generated is not a lot and hence not imposing the tax will not cause serious reduction in the government treasury.