free slides from ed dolan’s econ blog the economics of a soda tax created april 13, 2010
TRANSCRIPT
Free Slides fromEd Dolan’s Econ Blog
http://dolanecon.blogspot.com/
The Economics of a Soda Tax
Created April 13, 2010
Terms of Use: You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook,
Introduction to Economics, from BVT Publishers.
Posting P100413 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Tax Flavor of the Year: A Soda Tax
Taxes go in and out of fashion. One fashionable tax this year is a “soda tax,” usually extended to cover all sweetened beverages.
The popularity of a Soda tax is driven by two factors Rising budget deficits at both the
federal and state levels Increased concern about obesity
and its associated health-care costs Several states have instituted soda
taxes and a national soda tax is under consideration
Read more about soda taxes:Jane Brody, “A Tax To Combat America’s Sugary Diet,” NYT, Apr. 5, 2010Kelly Brownell et. al, “Ounces of Prevention,” New England Journal of
Medicine, April 30, 2009Soft Drink Taxes: A Policy Brief, Rudd Center for Food Policy and Obesity,
Yale University, Fall 2009 www.yaleruddcenter.org
www.pdclipart.org
Posting P100413 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Elasticity of Demand for Soda
The effectiveness of a tax depends, in part, on elasticity of demandThe more elastic demand, the greater
the reduction in consumption for a given tax
The less elastic demand, the greater the revenue raised by a given tax
A team of Yale economists reviewed 14 studies of price elasticity for soda:The mean estimated demand elasticity
for soft drinks was .79Estimates in individual studies varied
widely, from .13 to 3.18 Source: Tatiana Andreyeva et al., “The Impact of Food Prices on Consumption,” American Journal of Public Health, Feb. 2010
Posting P100413 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Effect of a Tax on Prices
A soda tax has three main effects It raises the price paid by consumers
from P0 to P1
It lowers the price received by producers from P0 to P2
It reduces the quantity sold from Q0 to Q1
Posting P100413 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Tax Revenue
The tax revenue received by the government is equal to the amount of the tax multiplied by the after-tax quantity (Q2)
Other things being equal, less elastic demand or less elastic supply will increase the tax revenue because there will be less change in quantity sold
Posting P100413 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Deadweight Loss
A tax also produces a deadweight loss, shown by the triangle
Part of the deadweight loss represents lost consumer surplus because consumers enjoy fewer units of the product after the tax
Part of the deadweight loss represents lost profit opportunities because producers sell less after the tax
Posting P100413 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Negative Externalities and Social Cost
If consumption of a good harms other people, it is said to have a negative externality , popularly called a “social cost.”
If social cost were included along with private cost of production, the supply curve for the good would shift upward
Many observers think consuming soda has a negative externality because it contributes to obesity, which in turn raises health insurance costs for everyone
Posting P100413 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Offsetting social cost with a “sin tax”
A tax on a good that has harmful social costs is often called a “sin tax”
If the tax is equal to the negative externality, the deadweight loss of the tax would be offset by the reduced burden of social cost, so that the tax would actually improve efficiency
Revenue from a “sin tax” on soda could go to any useful purpose . . .Reduction of budget deficitTargeted spending for reducing public
health costs associated with obesity