Question

A big tax on sugary drinks in Mexico has cut consumption. Sellers passed on the entire tax in higher prices to the consumers of these sugary drinks. The largest consumers of these drinks are the poor who suffer from diabetes and obesity. Source: The New York Times, October 19, 2015 a. What is the elasticity of demand for sugary drinks? Why? b. What is the elasticity of supply of sugary drinks? Why? c. Is the tax on sugary drinks progressive or regressive? Explain. d. Who bears the tax incidence in this case? Explain. e. Based on what principle would this tax be fair?

Answer 1

a. What is the elasticity of demand for sugary drinks? Why?

Answer:-

There is an inverse relationship between price and quantity demand.

According to the Law of Demand, as the own price of a good decreases, the quantity demanded of it increases, keeping other factors constant and vice versa.
Say for example, earlier you used to buy "x" brand of chocolate. Now the "x" brand increased its price, so you will reduce the consumption of "x" brand, thereby reducing demand.

According to the given Question

A big tax on sugary drinks in Mexico has cut consumption that will result in Higher prices and he largest consumers of these drinks are the poor so demand will fall in adverse direction as they will stop consuming such product or find some other substitute for it

and we already knew that Higher the price will drop the demand, this proves that demand of sugar drinks are highly elastic more than 1.

b. What is the elasticity of supply of sugary drinks? Why?

Answer:-

There is an Direct relationship between price and quantity Supplied..

The law of supply indicates the direction of change—if price goes up, supply will increase. But how much supply will rise in response to an increase in price cannot be known from the law of supply. To quantify such change we require the concept of elasticity of supply that measures the extent of quantities supplied in response to a change in price.

Elasticity of supply measures the degree of responsiveness of quantity supplied to a change in own price of the commodity. It is also defined as the percentage change in quantity supplied divided by percentage change in price.

According to given Question ;-

Sellers passed on the entire tax in higher prices to the consumers of these sugary drinks.

Higher the prices will increases supply

Elasticity of Supply is Highly Elastic.

c. Is the tax on sugary drinks progressive or regressive?

Answer:-

obviously Regressive, reducing demand will reduce sales and there will be a huge drop in sales revenue.

and also due to increase in price supply will also increase because there will lesser demand in market that will increase working capital cost to the company.

d. Who bears the tax incidence in this case?

Answer:-

As the sellers passed on the entire tax in higher prices to the consumers of these sugary drinks, the price which are offered now to consumer the Inclusive of Taxes and were paid by such cosumer , Hence Tax Incidence is beared by Ultimate Consumers of Sugar Drinks.