Soda Taxes & the Role of Government

Goals:

  • Have students review real-world economic example of government intervention
  • Link elasticities with taxes to determine welfare effects
  • Make the lecture memorable to increase retention

Relevant Clips:

Overview:

Recent public policy has focused on the health effects of consuming refined sugar and local authorities across the country (Berkeley, CA and Philadelphia, PA were the first two major cities) have decided to impose taxes on sugary beverages. One of the main concerns of this new tax was the regressive nature of the tax because low income consumers were more likely to purchase sugary beverages. Other issues involved which beverages would be taxed (since many juices weren’t, but still contain lots of sugar) and how to prevent consumers from shopping in an uncovered market.

Ghosh and Hall (2018) provide a short article on the Political Economy of Soda Taxation.

Discussion:

The first discussion around the topic should be based on the tradeoff between the efficiency and equity surrounding this form of taxation. If governments should be concerned about health concerns of its citizens, then attempting to restrict their intake of sugary beverages is one place to begin. A counter-argument would be that citizens have the right to consume items they would like and that governments shouldn’t be involved in such areas of personal life.

A follow-up discussion revolves around the elasticity of demand for sugary beverages. If consumers are very price inelastic to their beverages, taxes won’t have a large impact on the quantity of soda consumed, but it will result in a lower amount of deadweight loss and higher tax revenue for the government relative to a more elastic curve. A team of researchers looking at price changes for soda in Mexico found that the elasticity of soft drinks was 1.16, implying that a 10% increase in the price of sodas would decrease the quantity consumed by about 11.6%. The effects were larger for poor families (hinting again at the regressive nature of the taxes) or families living in more remote areas.

A final discussion can revolve around the role of government in society. While there are sectors that benefit from government intervention, like pollution management or public defense, should the government be so deeply involved in public health issues that are self-induced? While public outbreaks are of importance to society as a whole, should self-induced diseases be so heavily regulated by the government?