Question

Philadelphia mayor looks to fund pre-K with controversial soda tax-by the ounce. 1. Why might revenues generated from the tax fall short of expectations? 2. Do you think that Philadelphia should or shouldn't have adopted the tax to fund pre-K education? Support your brief argument with economic concepts covered in the course. 3.Suppose a government wants to use tax policy to persuade people to not consume certain products or services. Suppose, the government has limited resources and can only enforce (or collect) a limited number of taxes. Should that government target goods or services that have an elastic or inelastic price elasticity of demand (ED)? Why? 4. Suppose the goal of a government is to raise as much money as possible to fund governmental services. Should the government target goods and services that have an inelastic or elastic ED? Why?

Answer 1

Philadelphia mayor wants to fund Pre-K with soda tax by the ounce.

1. Revenues generated from the tax will fall short of expectations because soda is not a necessity, if the price of soda rises then people will start to consume less of soda, which will lead to less sales and less output generation by the firms, thereby less tax collection, as the sales decline.

2. Philadelphia shouldn't have adopted the tax to fund pre-K education as the revenues do not meet the expectations and there is a risk of falling tax collection because of a decline in consumption due to high taxes.

3. Suppose the government has limited resources and can only enforce limited number of taxes. The government should target goods and services which have an inelastic price elasticity of demand as an inelastic ED is characterised by no decline in demand even if the price increases for example for goods like oil, food grains and daily necessities, people will consume it even if the price increases cause they have no other choice as they need oil for their cars in order to transport goods and services.

4. If it wants to raise as much money as possible then it should target the goods and services which have an inelastic ED as people will go on consuming such products even if the price increases, for elastic ED on the other hand, if the price increases because of the taxes, people will not consume the product such as a car or discretionary item as its not a necessity.