This article is about the effect of taxation on sugary drinksin the USA. America has the biggest problem of obesity due to the oversupply ofthis demerit good. Demerit goods are goods that are considered to beundesirable for consumers yet are overprovided in a market. It is overprovided asit has negative externalities or because of consumer ignorance about itsharmful effects. Therefore, the soft drink market is an example of marketfailure.
The graph above displays the allocative efficiency of sugarydrinks which would be achieved when an optimal quantity (Q opt) would besupplied at an optimal price (P opt). It is theintersection of the marginal social benefit curve with the marginal social costcurve. Firms over supply sugary drinks so the MPB is greater than the MSB (asit affects society). Soft drinks are over consumed in the USA; with high demandfirms set a new equilibrium price for the new equilibrium quantity demanded.Price moves from P opt to P1 as quantityincreases from Q opt to Q1. Due to this negativeexternality there is a welfare loss, which involves a reduction in socialbenefits due to misallocation of resources for soft drinks. The shaded areaabove represents welfare loss. In March 2015 the US governThe US government imposed a 10% tax on every ounce of sugarydrinks.
This resulted in an upward shift of the supply curve, from S = MPC toMSC (= MPC + tax). Therefore, negative production externality is corrected bythe optimal tax policy where the tax is imposed which is exactly equal to thenegative externality. Hence the new equilibrium price increases from P m to P opt resultingin the decrease of quantity of soft drinks Q m to Q opt.The government attempted to makeseveral attempts in decreasing obesity but there are several disadvantages due tothe tax imposed. The disposable incomes of several individuals who continued topurchase sugary drinks would decrease. Prices increase significantly so middleand lower class people who continue to buy these will have lower livingstandards. Secondly, indirect tax is a form of backsliding tax. The tax paid byeveryone is the fixed but the poor are more affected by this price change.
Hencerich and poor people have to pay the same price for a product but rich peoplepay a lower proportion of their income in respect to poorer people. This iscertainly inefficient as it increases income inequality. Finally, for a smallerquantity of product sold the price increases by a greater percentage.
Consequently,firms receive reduced revenues than before. It mainly affects workers in localsoft drink factories as they now receive lower revenues and may not earn enoughwith such a low income. This may lead to greater structural unemployment; withthe limited skills they have they cannot seek other jobs thus increasingunemployment.
Nevertheless, the indirect taximposed has advantages as the US government has increased revenue withcollected tax. The article also mentioned that the government planned to investthis revenue on child care centres and increase funding on merit goods. It willencourage more Americans to use merit goods as they are turning towardshealthier substitutes. Lastly, it helps the US government work towards theirgoal of eliminating obesity in children. US currently has the biggest issue ofobesity worldwide, thus this was a measure to act against an importantissue. In the short run the indirect taximposed on the sugary drinks was ineffective. Initially the demand for itdecreased due to a lower PED.
The change in price of drinks, resulted in salesdecrease of about 10% nationwide. However, in the long run the taxation waseffective because consumers purchased substitutes which restored a high tax revenueturnover from other drinks to the government. Sales of healthier drinksincreased and in fact, there was a rise of sales for bottled water by about15.6%.
Furthermore, this also helps the US government achieve their aim as thistaxation was to reduce obesity rates; especially for the young generation.Certainly by the reduction of demand for these high sugar content drinks itwill lead to a greater fall in obesity rates in the population. The benefits outweigh the costs when usingindirect tax as the welfare cost is corrected to benefit the general populationas soft drinks are no more over consumed.ment imposed an indirect tax onall sugary drinks in the American market. For a soft drink can of 330ml ($1) itaccounts for an extra 12¢ and accounts for 68¢ for a 500ml bottle ($2).