In: Economics
Read the article below then answer the question that follows.
PHILADELPHIA (WTXF) - The controversial Philadelphia soda tax has started. Sunday, the city began imposing a 1.5 cent per ounce tax on the supply of sweetened beverages to retail dealers, which is supposed to go towards quality pre-K, Community Schools, and better parks, libraries and rec centers.
Among the items taxed: regular and diet sodas, and also teas. The tax is also levied on syrups and concentrates used to make sweetened drinks. And drinks considered “zero calorie” are also taxed.
The tax will be paid by distributors of sweetened beverages, but certainly passed on to customers.
According to the city, a distributor is any person who sells sweetened beverages to a dealer, and a dealer is any person who sells sweetened beverages at retail. Dealers include delis, restaurants, and grocery stores.
For them, the tax will be due the 20th of each month for the prior month. That means the first payment will be due February 20, 2017, for distribution activity in January 2017.
The 1.5-cent-per-ounce tax amounts to 18 cents on a 12-ounce can of soda or $1.44 on a six-pack of 16-ounce bottles. Two cities have soda or soft drink taxes but more than 30 cities and states have rejected them.
On Dec. 19, Common Pleas Court Judge Gary S. Glazer rejected the lawsuit challenging it filed by the American Beverage Association and others.
Lawyers for the beverage industry tried to block the tax, arguing it duplicates the state sales tax already imposed on soda and unfairly taxes drinks based on their size, not price.
But Shanin Specter, of Kline & Specter, PC, representing the plaintiffs in the beverage industry's lawsuit against the city, issued this three-word statement: "We shall appeal."
Suppose that someone has said: “Because the tax is paid by distributors, they will be 18c worse off for each can of soda they sell. That is why they are appealing the tax. Nobody else will be negatively impacted, because after all the distributers are the only ones who pay the tax.”
Explain what is wrong with this person’s statement.
Tax correctly depicted on Demand and Supply model, Diagram/s explained and used to support explanation, Discussion of which parties are impacted by the tax
As the statement suggest that only the distributors will be 18c worse off by the payment of the tax, whereas it is to be understood that the maximum retail price of the commodity is the gross aggregate of production cost, transportation cost, taxes and any other miscellaneous cost that may have been incurred in delivering the product to the end user or the consumer.
Hence all the statement that only the distributor will be impacted by the tax impose is not correct as it is the end user who will have to pay 18c more ultimately.
The distributor and the retailers along with the manufacturers may suffer a downfall in the demand as the prices hike up which is where the distributors will suffer and will have to struggle to keep demand moving the up graph.
As, price of soda will increase the demand for the commodity will be affected which can be understood from the following graph:
The figure above depicts the most basic relationship between the price of a good and its demand from the standpoint of the consumer. This is actually one of the most important differences between the supply curve and the demand curve. Where as supply graphs are drawn from the perspective of the producer, demand is portrayed from the perspective of the consumer.
As the price of a good increases the demand for the product will, except for a few obscure situations, tend to decrease. For purposes of our discussion, let's assume the price of soda before the tax was X$. If now after the tax is imposed and the price after the tax has increased by Y$ then the revised price will be X$+Y$ which will be Y$ costlier. Hence the consumer will have to pay X$+Y$ now to purchase the soda bottle where as previously price was X$ only.
This increase in price will affect some customers to reduce the consumption of soda and some to shift their preferences form soda to some other product or substitute which will be available for the same price of X$+Y$.
Hence the demand for the product will decrease with the imposing of taxes.