The economics of a soda tax
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  • 1. Free Slides from Ed Dolan’s Econ Blog 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 .
  • 2. 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, 2010
    • Kelly Brownell et. al, “Ounces of Prevention,” New England Journal of Medicine , April 30, 2009
    • Soft Drink Taxes: A Policy Brief, Rudd Center for Food Policy and Obesity, Yale University, Fall 2009
    Posting P100413 from Ed Dolan’s Econ Blog
  • 3. Elasticity of Demand for Soda
    • The effectiveness of a tax depends, in part, on elasticity of demand
      • The 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 .79
      • Estimates in individual studies varied widely, from .13 to 3.18
    Posting P100413 from Ed Dolan’s Econ Blog Source: Tatiana Andreyeva et al., “The Impact of Food Prices on Consumption,” American Journal of Public Health, Feb. 2010
  • 4. Effect of a Tax on Prices
    • A soda tax has three main effects
    • It raises the price paid by consumers from P 0 to P 1
    • It lowers the price received by producers from P 0 to P 2
    • It reduces the quantity sold from Q 0 to Q 1
    Posting P100413 from Ed Dolan’s Econ Blog
  • 5. Tax Revenue
    • The tax revenue received by the government is equal to the amount of the tax multiplied by the after-tax quantity (Q 2 )
    • 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
  • 6. 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
  • 7. 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
  • 8. 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 deficit
      • Targeted spending for reducing public health costs associated with obesity
    Posting P100413 from Ed Dolan’s Econ Blog