Question

Read the article below then answer the question that follows.

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 preK, 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.

Criteria:

-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

Answer 1

The person commented that tax will affect only distributors because it is imposed on them and only they will pay the tax. This is not however, correct. A tax creates a price difference, a kind of wedge between what buyers pay and what sellers receive. Though sellers are expected to pay the tax, the shift of the supply curve to the left due to higher cost of prodiuction and selling, will raise the buyer's final pay price and reduce seller's received price. In this sense one one side there is a loss to consumer surplus and on the otther side there is a loss to the producer surplus. These two losses are somehow compensated by government tax revenue but the remaining loss is not covered which becomes a deadweight burden on the society.

The graph below is drawn for example and scale is imaginary. It is indicative of the current situation.