Question

Among other reasons, the tax increase was designed to improve health conditions (soda = bad for you!). Before deciding to implement the tax increase, some people argued that a price restriction on Soda would force stores to charge a higher price for these beverages. Do price restrictions and tax increases have the same overall impact on the Supply and Demand for Soda? Explain with a properly labeled graph for each scenario. Answer all of the following questions. Each portion of a question requiring an explanation should have a minimum of a paragraph in length (5-6 sentences)

Answer 1

A price floor in the market for soda and a tax on its consmption have varied effects. A tax becomes distortionay becauseit creates a deadweight loss and so does the price floor. The price floor will benefit the sellers because they are able to sell a lower quantity at a higher price and thereby securing a producer surplus. In contrast, a tax reduces the surplus to both buyers and sellers.

Both instruments will reduce the quantity sold by government will revenue when a tax is imposed while price floor will not earn the government any revenue. In this sense, we see that while taxes do not lead to a surplus of the good and resdistribute s significant portion of the producer surplus to the government, the price floor causes extra production which uses resources of the economy. Hence the price restrictions and tax increases have the different overall impact on the Supply and Demand for Soda, where price restriction being a greater evil.