Question

The Australian Medical Association has proposed a national tax on sugar. A consumer advocacy group “Choice & Protection” is considering the position it should take on the tax proposal, and has commissioned you to prepare a report. Your terms of reference are:

“Provide a brief background on the rationale for the tax proposal and assess likely implications of a tax on sugar, including on:

Sugar consumption;

Consumer wellbeing (utility);

Potential impacts for different income groups;

Sugar production and the production and price of goods for which sugar is an input.

Based on the assessment, provide a recommendation on whether Choice & Protection should support or oppose the tax proposal.”

Answer 1

With the imposition of tax on sugar, the price of the sugar will rise. With the rise in the price of sugar plus since it is a normal good, its consumption will decline.

As the customer or the consumer utility or well being is dependent on the quantity of the good he consumes, now with the tax as the price has increased and the consumption has decreased the utility will also decline as a result.

The different income groups would have different impacts on due to the price rise.The groups who belong to higher income groups and whose budget makes a smaller portion of the sugar, they would not be much affected. While the income groups who spend a substantial portion of the income on sugar plus belongs to the lower income groups will get affected due to this price rise.

The sugar production will now depend on the demand of the sugar. The lower demand will cause a decline in the sugar production and so would affect the production of the derived good production. The prices of those goods which use sugar as an input will increase.

Based on the economic effects the tax would have on the consumers, the Choice & Protection should go against the tax proposal. As the tax has been proposed by the Medical Association mainly for the health effects sugar has, so instead of the economic impacts, the Choice & Protection should look for the health implications sugar has on the consumers.