Transcript Ed Dolan, Soda Taxes, April 13, 2010

Free Slides from
Ed 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.
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
www.pdclipart.org
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 www.yaleruddcenter.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 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
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 deficit
 Targeted spending for reducing public
health costs associated with obesity
Posting P100413 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/