Sun.Star Cagayan de Oro - - Opinion -

ONE of the es­sen­tial pro­vi­sions of the TRAIN law is the tax on su­gary drinks. A few years back, one of my stu­dents an­a­lyzed a sim­i­lar law that was passed in Berke­ley, Cal­i­for­nia. The anal­y­sis is very much ap­pli­ca­ble to our sit­u­a­tion right now, so I am fea­tur­ing Jae Sun Lee’s es­say re­gard­ing this tax. The mea­sure to im­pose tax (pay­ment im­posed upon ex­pen­di­ture by the gov­ern­ment) on su­gary drinks was first passed in US city of Berke­ley in Cal­i­for­nia.

The su­gary drinks in­dus­tries have at­tempted to al­low mea­sures to be not passed, as taxes on these drinks would de­crease its con­sump­tion. The ar­ti­cle also men­tioned that Berke­ley would be im­pos­ing one-cent per ounce tax on su­gary bev­er­ages, which would re­duce its con­sump­tion and con­se­quently re­duce obe­sity and di­a­betes. As the mea­sure to im­pose tax on su­gary bev­er­ages passes, this would shift the sup­ply of su­gary drinks to the left.

This shift in equi­lib­rium causes an in­crease in the price of su­gary drinks. If the de­mand for su­gary drinks is as­sumed to be in­elas­tic (a change in the price of a prod­uct leads to a pro­por­tion­ally smaller change in the quan­tity de­manded of it), there would be no sig­nif­i­cant change in the quan­tity de­manded as peo­ple still de­sire to pur­chase the drinks de­spite the in­crease in price. This is shown through the di­a­gram above - the change in quan­tity is rel­a­tively small com­pared to the change in price. The in­ci­dence of the tax on the con­sumers shows the amount of tax that is bur­dened on the con­sumer upon pur­chas­ing the su­gary drink. The in­ci­dence of the tax upon the pro­duc­ers is greater than the in­ci­dence on the pro­duc­ers when the de­mand for su­gary drinks is as­sumed to be in­elas­tic.

This means that if the su­gary drinks are in­elas­tic goods, then the tax would bur­den the con­sumers more when they pur­chase the drink. If the red and green boxes are added to­gether, it shows the rev­enue that the gov­ern­ment would re­ceive as a re­sult of the tax­a­tion. There will be a wel­fare loss, which is a so­cial ben­e­fit, that nei­ther the con­sumer nor the pro­ducer would re­ceive. On the other hand, if the de­mand for su­gary bev­er­ages is as­sumed to be elas­tic (change in the price of a prod­uct leads to a greater than pro­por­tion­ate change in the quan­tity de­manded of it).

The sup­ply of su­gary drinks shifts to the left due to the tax im­posed by the gov­ern­ment, which re­sults to a new equi­lib­rium. This re­sults to an in­crease in price and a de­crease in the quan­tity de­manded of the drinks.

How­ever, the de­crease in quan­tity de­manded of the prod­uct is rel­a­tively great as com­pared to an in­crease in price. Sim­i­lar to the sit­u­a­tion when de­mand is elas­tic, there are also in­ci­dences of con­sumer and pro­duc­ers tax bur­den, how­ever, a dif­fer­ent pro­por­tion of in­ci­dence can be seen, as the in­ci­dence on con­sumers is lesser than that of the pro­duc­ers when the de­mand for su­gary drinks is as­sumed to be elas­tic.

This im­plies that if the de­mand for the su­gary drinks is elas­tic, then the tax would bur­den the pro­duc­ers as com­pared to the con­sumers. Over­all, the ar­ti­cle talks about im­po­si­tion of tax on su­gary bev­er­ages but does not clearly state whether the de­mand for su­gary drinks in Berke­ley is in­elas­tic or elas­tic. Since su­gary bev­er­ages tend to be ad­dic­tive, the de­mand for it may be in­elas­tic. In this case, the gov­ern­ment may choose to im­pose more tax on bev­er­ages in more cities as there is a rel­a­tively small change in quan­tity de­manded de­spite the in­crease in price.

Al­though this tax on su­gary bev­er­ages may hurt the pro­duc­ers as stated in the ar­ti­cle and may also fail to re­duce obe­sity and di­a­betes, it can be used to gen­er­ate more gov­ern­ment rev­enue. With this rev­enue, the gov­ern­ment may in­crease ex­pen­di­ture on the health care of the peo­ple in terms of obe­sity and di­a­betes and even to sub­si­dize the firms.

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