http://welkerswikinomics.com/blog/2009/10/20/would-a-soda-tax-make-americans-better-off/ for students and teachers of AP and IB Economics Sun, 14 Mar 2010 08:03:37 +0000 http://wordpress.org/?v=2.9.2 hourly 1 http://welkerswikinomics.com/blog/2009/10/20/would-a-soda-tax-make-americans-better-off/comment-page-1/#comment-8967 Khairul Rusydi Tue, 10 Nov 2009 12:51:29 +0000 http://welkerswikinomics.com/blog/2009/05/12/would-a-soda-tax-make-americans-better-off/#comment-8967 1. This can be done by imposing a tax on the producers of soda. The revenue generated from this tax can then be used to finance healthcare policies. With a specific-tax, for example, the new equilibrium price increases ceteris paribus, as demonstrated by a leftward shift in the SS curve (or the Marginal Private Cost Curve). At this higher price, the qty dd and consumption of soda thus decreases. 2. Both will occur. Dominance of one over the other is indeterminate unless the PED of soda is known. Assuming that the demand for all soda is elastic, due to the availability of other sugary beverages like sports drinks and hot chocolate (who could resist hot chocolate anyway?) and assuming that the utility and satisfaction that consumers get from these is equivalent to that of soda, a PED that is positive and more than 1 indicates that an increase in price would lead to to a more than proportional fall in quantity demanded. Thus there would be a net revenue lost to the producer. 3. Assume that 'working efficiently' here implies that it is at the Socially Optinal Level and hence no negative externalities that would otherwise arise from the health problems from excessive drinking of soda and the strain it would place on state-funded healthcare, which are manifestations of Deadweight Welfare Loss. Hence in this hypothetically optimal state of production and consumption, consumer surplus would decrease, producer surplus would decrease, government revenue would increase and total social welfare would decrease. This is because there would be a DWL when a tax is imposed on an efficient market as there is now an underproduction compared to the Socially Optimal Level of output that was initially determined at the previous equilibrium level of Price and Qty. 4. PED and PES would influence the incidence of the tax and whether greater burden would fall on the producer or consumer. If PED is (relatively more) inelastic (than PES), the consumer's share of the tax would be greater. If PES is (relatively more) inelastic than (than PED), the producer's share of the tax would be greater. 1. This can be done by imposing a tax on the producers of soda. The revenue generated from this tax can then be used to finance healthcare policies. With a specific-tax, for example, the new equilibrium price increases ceteris paribus, as demonstrated by a leftward shift in the SS curve (or the Marginal Private Cost Curve). At this higher price, the qty dd and consumption of soda thus decreases.
2. Both will occur. Dominance of one over the other is indeterminate unless the PED of soda is known. Assuming that the demand for all soda is elastic, due to the availability of other sugary beverages like sports drinks and hot chocolate (who could resist hot chocolate anyway?) and assuming that the utility and satisfaction that consumers get from these is equivalent to that of soda, a PED that is positive and more than 1 indicates that an increase in price would lead to to a more than proportional fall in quantity demanded. Thus there would be a net revenue lost to the producer.
3. Assume that ‘working efficiently’ here implies that it is at the Socially Optinal Level and hence no negative externalities that would otherwise arise from the health problems from excessive drinking of soda and the strain it would place on state-funded healthcare, which are manifestations of Deadweight Welfare Loss.
Hence in this hypothetically optimal state of production and consumption, consumer surplus would decrease, producer surplus would decrease, government revenue would increase and total social welfare would decrease. This is because there would be a DWL when a tax is imposed on an efficient market as there is now an underproduction compared to the Socially Optimal Level of output that was initially determined at the previous equilibrium level of Price and Qty.
4. PED and PES would influence the incidence of the tax and whether greater burden would fall on the producer or consumer. If PED is (relatively more) inelastic (than PES), the consumer’s share of the tax would be greater. If PES is (relatively more) inelastic than (than PED), the producer’s share of the tax would be greater.

]]> http://welkerswikinomics.com/blog/2009/10/20/would-a-soda-tax-make-americans-better-off/comment-page-1/#comment-8615 David Dzidzikashvili Thu, 22 Oct 2009 21:18:26 +0000 http://welkerswikinomics.com/blog/2009/05/12/would-a-soda-tax-make-americans-better-off/#comment-8615 I think the question should be does any tax make Americans better off? Soda tax is just an additional price increase that will be passed on to the consumers. This can lower the demand and this will have no real benefit. If we assume that demand won’t change for soda sales, then this should bring more tax money, but during economic hard times, this does not look like a smart policy decision. We need to keep people buying more goods & products, any price increase won’t result in more buying, taking in consideration that people are more careful with spending, due to economic crisis. I think the question should be does any tax make Americans better off? Soda tax is just an additional price increase that will be passed on to the consumers. This can lower the demand and this will have no real benefit. If we assume that demand won’t change for soda sales, then this should bring more tax money, but during economic hard times, this does not look like a smart policy decision. We need to keep people buying more goods & products, any price increase won’t result in more buying, taking in consideration that people are more careful with spending, due to economic crisis.

]]>