Question

Watch the following PBS Newshour story on Philadelphia's implementation of a tax on sugary drinks: 1. Why might revenues generated from the tax fall short of expectations? 2. Do you think that Philadelphia should or shouldn't have adopted the tax to fund pre-K education? Support your brief argument with economic concepts covered in the course. 3. Suppose a government wants to use tax policy to persuade people to not consume certain products or services. Suppose, the government has limited resources and can only enforce (or collect) a limited number of taxes. Should that government target goods or services that have an elastic or inelastic price elasticity of demand (ED)? Why? 4. Suppose the goal of a government is to raise as much money as possible to fund governmental services. Should the government target goods and services that have an inelastic or elastic ED? Why?

Answer 1

1) Revenues generated from the tax might fall short of expectations if the demand for sugary drinks is relatively elastic and has a value greater than 1. This would mean that imposing a tax would actually reduce overall sales and hence the tax generated might fall short due to the large number of people that are deterred from buying such products.

2) I feel Philadelphia should adopt this taxation to fund education. The profits generated outweigh the possible harm caused to the shops in the cities. Moreover, the income just gets redistributed to the suburbs. If an educated community is built from the revenue, then larger benefits are reaped in the future.

3) Since the government wants to persuade people not to consume a certain product, they must do it in such a way that imposing a small tax causes a proportionately larger change in demand for that product. In other words the government should target goods with high price elasticity of demand. This causes overall revenues to decrease since an increase in price does not compensate for the drop in demand due to rise in price.

4) Since the government wants earn as much money as possible from a product, they must do it in such a way that imposing a tax causes a proportionately smaller change in demand for that product. In other words the government should target goods with low price elasticity of demand (inelastic). This causes overall revenues to increase even with a rise of price as the reduction is more than compensated by the rise in price.