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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.