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In 2015 a report by Public Health England recommended the imposition of a 20% tax on the sale of soft drinks that contain high levels of sugar - Edexcel - A-Level Economics A - Question 7 - 2017 - Paper 1
Question 7
In 2015 a report by Public Health England recommended the imposition of a 20% tax on the sale of soft drinks that contain high levels of sugar. Evaluate the likely ... show full transcript
Worked Solution & Example Answer:In 2015 a report by Public Health England recommended the imposition of a 20% tax on the sale of soft drinks that contain high levels of sugar - Edexcel - A-Level Economics A - Question 7 - 2017 - Paper 1
Step 1
Definition of a tax
Answer
A tax is a mandatory financial charge imposed by the government on individuals or entities, which may take the form of an ad valorem tax that is proportionate to the value of goods sold. In this specific case, the proposed 20% tax would apply to soft drinks containing high sugar levels.
Step 2
Economic effects of the tax
Answer
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Increase in Price and Demand Reduction: The imposition of a 20% tax is expected to increase the price of sugary drinks. This price rise would lead to a reduction in demand, as consumers may seek healthier alternatives due to the higher cost.
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Reduction of Consumer Surplus: With higher prices, consumer surplus and producer surplus may decrease. Consumers might not benefit as much from utility gained from consuming sugary drinks, which can subsequently affect producer profits.
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Change in Market Behavior: Consumers may shift towards healthier drink options, thus increasing demand in those markets. This shift is likely to stimulate innovation and product diversity in the healthcare drink sector.
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Increased Revenue for the Government: Tax revenue generated from this policy could be redirected towards funding healthcare initiatives to mitigate the health issues associated with high sugar consumption, such as obesity and diabetes.
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Impacts on Employment: The tax might influence employment within the sugary drinks sector, resulting in reduced jobs. Conversely, there might be job growth in the healthier drinks market as demand shifts.
Step 3
Evaluation of Effects
Answer
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Price Elasticity of Demand: The effectiveness of the tax will depend on the price elasticity of demand for sugary drinks. If demand is inelastic, the tax may not significantly reduce consumption, and revenue could be generated without substantial behavioral changes.
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Substitutes: The more substitutes available, the more likely consumers are to switch to healthier options, amplifying the intended effect of the tax. This illustrates the importance of market diversity in response to the tax.
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Consideration of Health Outcomes: Long-term health implications and improvements, such as reduced rates of diseases attributed to high sugar consumption, may take time to manifest, complicating immediate evaluations of the tax's effectiveness.
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Income Effect: This tax may disproportionately affect low-income consumers who spend a larger portion of their income on consumables, raising discussions about regressivity in taxation.
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Government Revenue Allocation: Utilization of the revenue from this tax for public health campaigns could future-proof its effectiveness, emphasizing the government’s commitment to health benefits beyond mere revenue generation.