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Economic Issues
For your Classroom
The Economics
of a Soda Tax
Updated October 11, 2017
Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free
to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like
the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing.
Ed Dolan is a Senior Fellow at the Niskanen Center
and the author of Ed Dolan’s Econ Blog
Tax Flavor of the Year: A Soda Tax
 In 2014, Berkeley, California became
the first city in the US to institute a tax
on sugar-sweetened beverages
(SSBs), popularly known as a “soda
tax”
 Philadelphia, Seattle, Chicago, and
other cities followed. France, Denmark,
and Mexico also have soda taxes.
 The popularity of a Soda tax is due to:
 The need for additional tax revenue at
all levels of government
 Increased concern about obesity and
its associated health-care costs
 But soda taxes face fierce opposition.
Chicago’s was repealed in Oct. 2017
Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
Elasticity of Demand for Soda (1)
 The effectiveness of a tax depends,
in part, on how sensitive soda
consumption is to a change in price
 In economic terminology, the
percentage decrease in consumption
resulting from a 1 percent increase in
price is known as the elasticity of
demand
If a given increase in price produces
a large change in consumption,
demand is “more elastic”
If the increase in price is smaller,
demand is “less elastic”
Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
Elasticity of Demand for Soda (2)
 The effectiveness of a tax depends, in
part, on elasticity of demand
The more elastic demand, the greater
the reduction in consumption
The less elastic demand, the greater the
revenue raised by a given tax
 A recent review of the literature by Lisa
M. Powell and others found:
Elasticity of demand for soft drinks as a
whole was about 0.86
Elasticity for regular SSBs was greater,
about 1.25, since a tax on SSBs would
cause some to switch to diet drinks
Source: Lisa M. Powell et. al, “Assessing the Effectiveness of Food and Beverage Taxes,” http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3556391/
Updated Oct. 11, 2017 Ed Dolan’s Econ Blog

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This document discusses various policies and campaigns aimed at promoting healthier food choices and combating obesity. It discusses New York City laws requiring calorie counts on menus and limiting soda portion sizes. It also examines criticisms of these policies for focusing too much on individual choices rather than broader societal factors influencing obesity rates. Studies on the effectiveness of these campaigns produced mixed results, with some improved awareness but little change in behaviors.

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Soda taxes and the prices of sodas and other drinks evidence from mexico
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To combat a growing obesity problem, Mexico imposed a nationwide tax on drinks with added sugar, popularly referred to as a “soda tax,” effective January 2014. I analyze data on taxed and untaxed products collected as part of Mexico’s Consumer Price Index program to estimate how prices responded to the tax. Prices of regular sodas jumped by more than the amount of the tax in the month that the tax took effect.

soda taxesprices of sodas
Effect of a Tax on Prices
A soda tax has three main effects
 It raises the price paid by consumers
from P0 to P1
 It lowers the price received by
producers from P0 to P2
 It reduces the quantity sold from Q0
to Q1
Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
Tax Revenue
 The tax revenue received by the
government is equal to the amount
of the tax multiplied by the after-tax
quantity (Q2)
 Other things being equal, less
elastic demand or less elastic
supply will increase the tax revenue
because there will be less change in
quantity sold
Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
Deadweight Loss
A tax also produces a deadweight loss,
shown by the triangle
 Part of the deadweight loss
represents lost consumer surplus
because consumers enjoy fewer
units of the product after the tax
 Part of the deadweight loss
represents lost profit opportunities
because producers sell less after
the tax (lost producer surplus)
 Note: Follow this link for a review of the
concepts of consumer and producer
surplus
Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
Negative Externalities and Social Cost
 If consumption of a good harms other
people, it is said to have a negative
externality , popularly called a “social
cost” or “spillover effect”
 If social cost were included along with
private cost of production, the supply
curve for the good would shift upward
 Many observers think consuming
soda has a negative externality
because it contributes to obesity,
which in turn raises health insurance
costs for everyone
Updated Oct. 11, 2017 Ed Dolan’s Econ Blog

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PSAD 414 – Group Project Ethical Implications of Social Media Use in Public Safety Group Epsilon Group Epsilon Introduction/Topic Overview 2 Slides 2 Slides 2 Slides 2 Slides 2 Slides References 2 TABLE OF CONTENTS Group Epsilon INTRODUCTION 3 Group Epsilon 4 Group Epsilon 5 Group Epsilon 6 Group Epsilon 7 Group Epsilon 8 Group Epsilon 9 Group Epsilon 10 Group Epsilon 11 Group Epsilon 12 REFERENCES Group Epsilon Discussion 1 responses needed Marginal Rate of Substitution What is the marginal rate of substitution (MRS) and why does it diminish as the consumer substitutes one product for another? Use examples to illustrate. Guided Response: In 300 words or more, please, provide your response to the above discussion question. Find two goods from your own consumption basket and explain how the MRS changes for the two products as you substitute one for the other. Respond substantively (150 words) to at least two of your classmates’ postings. Substantive responses use theory, research, and experience or examples to support ideas and further the class knowledge on the discussion topic. Respond to Stephen Ghosal post What is the marginal rate of substitution (MRS) and why does it diminish as the consumer substitutes one product for another? Use examples to illustrate. The marginal rate of substitution (MRS) is defined as the amount of one product a consumer is willing to give up for one more unit of a different product, while still remaining at the same utility level (Douglas, 2012).  As a consumer decides between the consumption between two products, the decision the consumer makes effects both products in different ways.  The reason the marginal rate of substitution begins to diminish once the consumer substitutes one product for another is because the marginal utility is affected by the substitution process (Douglas, 2012).  The marginal utility is defined as the change in total utility due to the consumption of one more unit of that product, holding constant the consumption of the other product (Douglas, 2012).  Since one product is being utilized more, then the other product is being used less at that expense.  An example of marginal rate of substitution is a consumer choosing between different restaurants that have differing atmospheres and cuisines, but still have the same cost. When you rate these different restaurants by the different atmospheres and by the level of the cuisine, and create a ratio out of the two numbers, this will give the consumer a better idea of which restaurant their time and money should be spent at, even though they enjoy having dinner at all the different options. This showcases marginal rate of substitution because the consumer is giving up the amount of time and money they spend at one restaurant, to spend at another restaurant that they enjoy more, at the same utility level.  If the situation had been either choos ...

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The carbon price is expected to cause a 0.6% increase in the cost of living in 2012-13, or around 60 cents for every $100 spent. This impact is smaller than previous economic reforms like the GST and spikes in global oil prices. The average household will see weekly expenses rise by $9.10 before receiving government assistance. Assistance measures will offset costs for many households, with some groups like low-income families expected to be better off. The carbon price provides incentives for businesses to cut emissions and invest in cleaner technologies.

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The document provides instructions for requesting writing assistance from HelpWriting.net. It outlines a 5-step process: 1) Create an account with a password and email. 2) Complete a 10-minute order form providing instructions, sources, and deadline. 3) Review bids from writers and choose one based on qualifications. 4) Receive the paper and authorize payment if satisfied. 5) Request revisions to ensure satisfaction, with a refund offered for plagiarized work.

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Offsetting social cost with a “sin tax”
 A tax on a good that has harmful
social costs is often called a “sin tax”
 If the tax is equal to the negative
externality, the deadweight loss of the
tax would be offset by the reduced
burden of social cost, so that the tax
would actually improve efficiency
 Revenue from a “sin tax” on soda
could go to any useful purpose . . .
Reduction of budget deficit
Targeted spending for reducing public
health costs associated with obesity
Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
Are Soda Taxes Good Public Policy?
Even if soda taxes work, are they good public policy? According to a
thorough study by Donald Marron and others at the Tax Policy Center*:
 Well-designed taxes can encourage people to make healthier choices and can
encourage businesses to develop and market healthier products.
 However, soda taxes are regressive—they place a relatively greater burden on
people with lower incomes, who consumer relatively more soda
 Other critics say it is bad policy to tie support of schools, healthcare, or another
worthy cause to a dedicated tax rather than to general revenue
 But still others say soda taxes don’t go far enough—we should tax all sugar
 The bottom line: Taxes are an imperfect instrument for addressing nutrition and
health concerns, but they may make sense as part of larger policy efforts
related to obesity and excess sugar consumption
Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
*Donald Marron et al., “Should We Tax Unhealthy Food and Drinks?” Tax Policy Center Dec. 2015
Click on the image to learn more about
Ed Dolan’s Econ texts
or visit www.bvtpublishing.com
For more posts and slideshows, Follow Ed Dolan’s Econ Blog
Follow @DolanEcon on Twitter

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The Economics of a Soda Tax

  • 1. Economic Issues For your Classroom The Economics of a Soda Tax Updated October 11, 2017 Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing. Ed Dolan is a Senior Fellow at the Niskanen Center and the author of Ed Dolan’s Econ Blog
  • 2. Tax Flavor of the Year: A Soda Tax  In 2014, Berkeley, California became the first city in the US to institute a tax on sugar-sweetened beverages (SSBs), popularly known as a “soda tax”  Philadelphia, Seattle, Chicago, and other cities followed. France, Denmark, and Mexico also have soda taxes.  The popularity of a Soda tax is due to:  The need for additional tax revenue at all levels of government  Increased concern about obesity and its associated health-care costs  But soda taxes face fierce opposition. Chicago’s was repealed in Oct. 2017 Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
  • 3. Elasticity of Demand for Soda (1)  The effectiveness of a tax depends, in part, on how sensitive soda consumption is to a change in price  In economic terminology, the percentage decrease in consumption resulting from a 1 percent increase in price is known as the elasticity of demand If a given increase in price produces a large change in consumption, demand is “more elastic” If the increase in price is smaller, demand is “less elastic” Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
  • 4. Elasticity of Demand for Soda (2)  The effectiveness of a tax depends, in part, on elasticity of demand The more elastic demand, the greater the reduction in consumption The less elastic demand, the greater the revenue raised by a given tax  A recent review of the literature by Lisa M. Powell and others found: Elasticity of demand for soft drinks as a whole was about 0.86 Elasticity for regular SSBs was greater, about 1.25, since a tax on SSBs would cause some to switch to diet drinks Source: Lisa M. Powell et. al, “Assessing the Effectiveness of Food and Beverage Taxes,” http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3556391/ Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
  • 5. Effect of a Tax on Prices A soda tax has three main effects  It raises the price paid by consumers from P0 to P1  It lowers the price received by producers from P0 to P2  It reduces the quantity sold from Q0 to Q1 Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
  • 6. Tax Revenue  The tax revenue received by the government is equal to the amount of the tax multiplied by the after-tax quantity (Q2)  Other things being equal, less elastic demand or less elastic supply will increase the tax revenue because there will be less change in quantity sold Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
  • 7. Deadweight Loss A tax also produces a deadweight loss, shown by the triangle  Part of the deadweight loss represents lost consumer surplus because consumers enjoy fewer units of the product after the tax  Part of the deadweight loss represents lost profit opportunities because producers sell less after the tax (lost producer surplus)  Note: Follow this link for a review of the concepts of consumer and producer surplus Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
  • 8. Negative Externalities and Social Cost  If consumption of a good harms other people, it is said to have a negative externality , popularly called a “social cost” or “spillover effect”  If social cost were included along with private cost of production, the supply curve for the good would shift upward  Many observers think consuming soda has a negative externality because it contributes to obesity, which in turn raises health insurance costs for everyone Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
  • 9. Offsetting social cost with a “sin tax”  A tax on a good that has harmful social costs is often called a “sin tax”  If the tax is equal to the negative externality, the deadweight loss of the tax would be offset by the reduced burden of social cost, so that the tax would actually improve efficiency  Revenue from a “sin tax” on soda could go to any useful purpose . . . Reduction of budget deficit Targeted spending for reducing public health costs associated with obesity Updated Oct. 11, 2017 Ed Dolan’s Econ Blog
  • 10. Are Soda Taxes Good Public Policy? Even if soda taxes work, are they good public policy? According to a thorough study by Donald Marron and others at the Tax Policy Center*:  Well-designed taxes can encourage people to make healthier choices and can encourage businesses to develop and market healthier products.  However, soda taxes are regressive—they place a relatively greater burden on people with lower incomes, who consumer relatively more soda  Other critics say it is bad policy to tie support of schools, healthcare, or another worthy cause to a dedicated tax rather than to general revenue  But still others say soda taxes don’t go far enough—we should tax all sugar  The bottom line: Taxes are an imperfect instrument for addressing nutrition and health concerns, but they may make sense as part of larger policy efforts related to obesity and excess sugar consumption Updated Oct. 11, 2017 Ed Dolan’s Econ Blog *Donald Marron et al., “Should We Tax Unhealthy Food and Drinks?” Tax Policy Center Dec. 2015
  • 11. Click on the image to learn more about Ed Dolan’s Econ texts or visit www.bvtpublishing.com For more posts and slideshows, Follow Ed Dolan’s Econ Blog Follow @DolanEcon on Twitter