Question

Excessive sugar consumption has been proven to have an adverse effect on public health. Recently, the city of New York took measures to ban the sale of soda. Mexico on the other hand, imposed taxes on sugary beverages and other junk food to reduce the growing rate of obesity in the country. In California, several cities have rejected a soda tax while the city of Berkeley approved Measure D in 2014, levying a tax on sugary beverages. Now policymakers in California want to pass a statewide tax on sweetened drinks to reduce consumption and thereby reduce external costs on society.

1. Discuss the typical effects of a tax.

2. In your opinion, should the government impose a tax on sugary beverages? How will the tax affect people of different income levels? How will it affect businesses?

3. According to the articles you read, have “soda taxes” had the intended effect in other cities or countries? Do you believe that a soda tax will have the same effects in California? Will it have the same impact as the tax on cigarettes?

4. Instead of or in addition to a tax, how can the government combat the growing problem of excessive sugar consumption and obesity? What are other forms of intervention?

Answer 1

1. Typical effects of a tax are increase in the cost of the item, thus consumers have to spend more on products which leads to increase in price level and less supply as less number of individuals are able to afford the product. If demand is inelastic, that is consumers still prefer and spend even if the price increases than supply doesn't fall as much and the government is able to collect more revenue which is spent on public services.

2. Yes, the government should impose a tax on sugar beverages as there is a negative externality which occurs if the government doesn't impose wherein because of excessive consumption, as the prices are low, obesity level increases, which leads to expenditure on healthcare and thus private costs increase which is why tax should be imposed as higher prices lead to less consumption and less number of people turning obese.

People of different income levels will be taxed disproportionately as people who are earning less will have to pay the same price, which leaves less income in their hands to save. At the same time, people who have higher income, will be spending less on these items. Thus people who have low income will be taxed disproportionately and spend less money on such items, while those who earn more, will be willing to spend more.

Businesses will have to produce less number of items as demand reduces because of higher prices. This leads to less supply and reduced profitability.

3. Yes, soda taxes have had the intended effects and will have the same effect in California as people will have to spend more, even if the per capita income might be high, there are still people who earn minimum wages, and they will avoid consuming these products or buy them less. Yes, it will have the same impact as the tax on cigarettes, as consumption will reduce.

4. The government can increase marketing expenditure of benefits of eating healthy, thus by constantly looking at such advertisements, one will be inclined to consume healthy products. The other way is by increasing the supply of healthy products and making it cheap as compared to sugar products. Reducing incentives for firms so as to reduce production of sugar items, etc.