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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 m... 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
Economic Effects of Tax on Soft Drinks
Answer
The imposition of a 20% tax on sugary soft drinks will likely result in several microeconomic effects.
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Increase in Price and Reduction in Demand: The introduction of the tax will raise the price of sugary drinks. As the price increases, the law of demand suggests that the quantity demanded will decrease, leading to a reduction in consumption of these beverages.
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Substitution Effect: Consumers may begin to substitute sugary drinks with healthier alternatives, such as water or low-sugar beverages. This shift in consumer behavior could increase the demand for healthier drinks.
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Changes in Consumer Surplus and Producer Surplus: As the price of sugary drinks rises due to the tax, the consumer surplus (the difference between what consumers are willing to pay and what they actually pay) decreases. Similarly, producers may see a reduction in their surplus as their profits decrease due to lower sales volumes.
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Increased Government Revenue: The tax could provide significant revenue for the government, which may be allocated towards health initiatives and improving public healthcare services.
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Impact on Public Health: Reducing the consumption of sugary drinks could lead to improvements in health outcomes, such as a decrease in obesity, diabetes, and heart disease, thus reducing the healthcare burden.
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Employment Effects: The tax may impact employment in the soft drinks industry, potentially leading to job losses. However, it may create new jobs in the healthier beverage sector as demand shifts.
Step 2
Diagram: Indirect Tax and Price Elasticity
Answer
Including a diagram to illustrate the indirect tax on sugary drinks can be beneficial. The supply curve shifts vertically upwards by the amount of the tax, indicating an increase in prices.
- Price Elasticity of Demand: The extent of the reduction in quantity demanded will depend on the price elasticity of demand for sugary drinks. If the demand is elastic, the quantity sold will decrease significantly compared to inelastic demand where the change would be minimal.
Step 3
Evaluation of Tax Impact
Answer
The evaluation of the likely microeconomic effects of this tax must also consider:
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Elasticity of Demand: If the demand for sugary drinks is price elastic, the tax will significantly reduce consumption. Conversely, if demand is inelastic, the effect on quantity demanded will be limited.
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Substitutes Availability: The presence of readily available substitutes will amplify the effects of the tax on sugary drinks.
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Long-Term Effects: Over time, consumer habits might change, potentially leading to sustained reductions in sugary drink consumption and improved health outcomes.
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Incidence of Tax: The tax burden may not fall entirely on consumers; producers could share the burden, impacting their profitability.
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Potential Regressive Nature: The tax could disproportionately affect lower-income consumers who spend a larger percentage of their income on such products.