Question 1: Mexico's Sugar Tax
1: The economics of a sugar tax with reference to evidence from Mexico A tax on Sugar Sweetened Beverages (SSB) introduced in Mexico in 2014 increased the price of SSB by about 10%. An evaluation of the first two years of this measure found that SSB consumption fell on average by 7.6%, with a larger decrease (11.7%) in low income households. The study also estimated an increase in consumption of unsweetened beverages, particularly bottled water, of 2.1% (WHO, 2017)
- What is the own price elasticity of demand for SSBs in Mexico based on the figures given in the WHO article? Calculate it
- For the economy on average, and For low income households
- Based on your results to part a, which group is more responsive to the tax on SSB –low income households or the Mexican economy as a whole?
- Explain factors that determine responsiveness to a price increase. Which of these factors might explain the difference you have found in parts (a) and (b)
- Calculate the cross price elasticity between SSB and bottled water, based on the figures given in the World Health Organisation article. Use your answer to explain what cross price elasticity measures.
- Draw a demand and supply diagram for the market for Sugar Sweetened Beverages (SSB). Name and fully label your diagram including both axes, and indicate and explain points of interest using P for price (P1, P2 etc) and Q for quantity (Q1, Q2 etc).
Draw the demand curve assuming the elasticity for the whole Mexican economy holds. (Don’t use actual numbers, it
can’t be exact with the information given –just decide roughly how steep or flat to draw it, and give a reason for your choice).
- Now work further on your diagram in part (e)to show the impact of a tax on SSB. Illustrate and explain how the tax affects the price for consumers and producers and the quantity consumed. Also indicate the area on the diagram that represents tax revenue.
- Some experts recommend a public campaign to raise awareness about the health effects of too much sugar either instead of, or combined with a tax.
i) Redraw your diagram from part (e) above (that is, before a tax is imposed) to illustrate the impact of such a campaign on the market for SSB, and explain your diagram.
ii) Compare and contrast the impact of an awareness campaign with that of a tax on SSB with respect to changes in both price and quantity, and the impact on government revenue. Will an awareness campaign have a bigger or smaller impact on consumption of SSBs by low income Mexican households compared with the economy as a whole?
iii) Discuss the impact of combining an awareness campaign and a tax on the quantity of SSB consumed. (No need to illustrate).
The 2020 Australian of the year, Dr James Muecke, has called for a sugar tax In Australia to help tackle health problems such as obesity and type 2 diabetes.(ABCa 2020). His proposal was discussed by journalist Patricia Karvelas and Jane Martin from the Obesity Policy Coalition (ABCb 2020), and Alexandra Beech interviewed Federal Health Minister Greg Hunt, Geoff Parker from the Australian Beverages Council and Dr Anthony Bartone from the Australian Medical Association about the proposal on ABC News (ABCc2020).
In November 2017 journalist Andrew West interviewed Professor Bruce Neal from the George Institute for Global Health, and Dr Jenny May, a rural GP and head of rural health at the university of Newcastle about the ethics of a sugar tax(ABC 2017).
Critically analyse the arguments put forth for and against a sugar tax using these interviews and your analysis from Question 1
Often in economics it is important to recognise the costs or benefits of any unintended consequences arising from policy decisions.
Abisko is a little town north of the Arctic Circle in Sweden. It has one shop; a general supermarket, which services the large and remote area around the town. Curiously, more than half the products in the supermarket are sweets, chocolates, sweet drinks (SSB) and pallets of large packs of sugar(see photos below).
Abisko is about 1 hour and 20 minute’s drive from Narvik in Norway. Why might this fact influence the quantity of sugary products in Abisko’s supermarket? Is this an example of an unintended consequence? Discuss.
Question 1: Mexico's Sugar Tax
Own price elasticity of demand is estimated by measuring percentage change in quantity demanded relative to percentage change in price. A 10% increase in price of Sugar Sweetened Beverages leads to a 7.6% decrease in consumption of such beverages. Therefore, price elasticity of demand of Sugar Sweetened Beverages for the economy on average is
When considered for low income household, the same percentage increase in price leads to a larger decrease in price. For low income household, consumption decreases by 11.7%. Therefore, price elasticity of demand for low income household is
A direct impact of tax is to increase price of the good. Responsiveness to tax therefore depends on responsiveness to price change which is indicated by own price elasticity of demand. Elasticity of demand of SSB for the economy on average is -0.76 meaning 1 percent increase in price of SSB lowers demand by 0.76 percent. Since demand responds by a lower proportion than price, demand is relatively inelastic (Karl et al. 2019). Price elasticity of demand for low income is -1.16. The elasticity measure suggests that 1% increase in price of SSB lowers demand by 1.16 percent. Since here demand responds more than price, demand is relatively elastic. Any proposed tax which increases price of SSBs, therefore causes low income household to respond more in comparison to the economy as a whole.
Responsiveness to a price increase depends on various factors. Some of these factors are as follows
Type of the commodity
One vital determinant of price elasticity of demand is nature of the commodity. Elasticity varies depending on type of commodity. If the commodity is necessary, then demand responds less when price increases. However, if the commodity is a luxury, then people reduce demand to a large extent when price increase.
Level of income
People belonging to high income group responds less to a price increase relative to people belonging to low income groups. This is because people having higher income are not affected much when price changes. In contrast, people having lower average income are affected much with a change in price. As a result, for same good, price elasticity of demand for low income people is found to be more elastic than price elasticity of demand for high income people.
Available substitutes determine price elasticity of demand. If people can substitute demand with cheaper products, then demand responds more to an increase in price. When demand cannot be substituted then then demand responds less to price increase.
Question 2: Sugar Tax for Australia
Level of initial price affects price elasticity of demand. In case of costly goods such as TV, laptops and others demand responds much for a small change in price (Kolmar 2017). In contrast, for inexpensive goods, demand does not respond much with price change.
Other determinant of elasticity of demand are postponement of consumption, number of use, share of total income spent and time period.
Relation between price elasticity of demand and income level explaining difference in price elasticity of demand between economy as whole and that of low income household. Low income household having income lower than the average income of the economy as a whole is more responsiveness to any given increase in price of SSB compared to Mexican economy as a whole.
Cross price elasticity of demand is estimated by measuring percentage change in quantity demanded of a good relative to a change in price of related goods (Browning and Zupan 2020). In response to 10 percent increase in price of SSB leads to increase in consumption of bottled water by 2.1 percent. Therefore, cross price elasticity of demand between SSB and bottled water can be estimated as
Cross price elasticity of demand measures how demand of a good changes as a result of change in price of the related good. Cross price elasticity of demand between SSB and bottled water is obtained as positive. That means demand of bottled water increase when price of SSB increases. The obtained estimate suggests demand for bottled water increases by 0.21 percent for a 1 percent increase in price of SSB. Positive cross price elasticity implies SSB and bottled water are substitutes.
Figure 1: Figure showing Sugar Sweetened Beverage Market
Market of SSB is described in the above figure. Supply of SSB is shown by S1S1. Demand of SSB is shown by D1D1. Given that price elasticity of demand of SSB for the economy as a whole is less than 1 the demand curve is drawn steeper. E1 is the market equilibrium point having an equilibrium price of P1 and equilibrium quantity of SSB as Q1.
Figure 2: Figure showing impact of tax on SSB
Introduction of tax shifts supply curve of SSB to left by the tax amount. Equilibrium shifts from E1 to E2. Buyers pay a higher price of PB and sellers receive a lower price of PS. Equilibrium quantity of SSB falls from Q1 to Q2. Government earns a revenue equal to quantity sold of SSB times per unit tax shown by the shaded rectangle (Backholer et al. 2016).
Question 3: Unintended Consequences
Figure 3: Figure showing impact of social public awareness campaign
Public awareness campaign by raising awareness among people reduces demand for sugars sweetened beverages (Morley et al. 2018). The demand curve shifts left. Price falls to P2 and quantity falls to Q2.
The awareness campaign reduces overall price and quantity in the market of sugar sweetened beverages. Unlike tax, there is no difference in price that consumers pay and that sellers receive. Sellers of sugar sweetened beverages are in same position under awareness campaign as that under tax since in both cases they receive a lower price. Consumers however are better off under awareness campaign since they have to pay a lower price. Government under taxation receive revenue while under awareness campaign there no revenue to the government (Castello and Casasnovas 2020). The awareness campaign and resulted decrease in price may encourage consumption of SSBS by low income household compared to the economy as a whole because of a higher elasticity of demand for low income household.
If awareness campaigned are combined with a sugar tax. then there is possibility of a larger decline in quantity of SSB consumed. This is because both a decline in demand (due to awareness campaign) and decline in supply (because of tax) jointly lowered the equilibrium quantity of SSB.
Excessive intake of sugar leads to several health problems such as diabetes, obesity, tooth decay and other. Sugar consumption has a private cost in terms of lower life expectancy to the individual as well as a social cost come in form of higher cost of healthcare and lower productivity. In Australia, obesity and type 2 diabetes resulted from excessive sugar consumption have become two growing public health issues. Obesity and overweight which is one major health concerns for Australian causes because of imbalances in energy that is resulted when intake of energy through eating and drinking are larger than energy used through physical activities. More than 20% children in Australia are either obese or overweight. 27% children of age 5-17 in Australia are either overweight or obese. Two third of the Australian adults are suffering from obesity. These statistics are increasing every year implying growing problem of obesity in Australia (aihw.gov.au 2017). In 2017-2018, 1 million Australian constituting 5 percent of adult population reported to have type 2 diabetes. Type 2 diabetes have found to be higher among males than among females. The proportion is twice for low socioeconomic group compared to high socioeconomic group (aihw.gov.au 2019). One root cause of the two health problems is consumption of sugar. Dr. James Muecke in his interview has expressed great concern for these health problem and other associated health problems. Type 2 diabetes lead to blindness of working age population in Australia. The argument for sugar tax therefore has been put forward by Dr, Muecke in order to reduce consumption of sugar and prevents the health consequences resulted from excessive intake of sugar. There are several arguments supporting imposition of sugar tax as a means to reduce consumption of sugar tax. Sugar tax by increasing price of sugar food and beverages encourage people to reduce consumption of sugar and shifts preferences towards healthy food. From can earn revenue from imposition of sugar tax. This revenue can be spent to bear public health expenditure. Taxing sugar may encourage firms to produce health food and snacks. Many countries have already introduced a tax on sugar and have experienced a decline in sugar consumption. In view of these arguments, Dr. James Muecke has supported sugar tax for reducing consumption of sugar in Australia (Kelly 2020). In the interview with journalist Andrew West, Professor Bruce Neal from the George Institute for Global Health provided similar arguments regarding excessive consumption of sugary drinks and foods. He said, companies selling sugary item uses attractive advertising to attract more consumers. In order to maximize profit and sales these companies make advertisement using sports stars and other celebrities. With these attractive advertisement people get convinced easily and consume sugary beverages. As mentioned by Professor Neal this has become more of a habit among people. The tendency is higher among the low income household. People belonging to lower socioeconomic group are much concern about their health and are more likely to have unhealthy food habit. The imposition of tax often has an unfair consequence for low income households. This is because for these households’ sugar tax is likely to be regressive since it takes a higher proportion of income of these households. The low income households tend to have a greater sensitivity to price change. As obtained in the Mexican case, price elasticity of demand of SSB for low income household is greater than that for the economy as a whole. However, as the concerned raised by Dr. Jenny May, a rural GP and head of rural health at the university of Newcastle these poor people do not have access to heathy food and can further substitute consumption of sugary beverages with other unhealthier food having further adverse consequences for health (West 2017). Therefore, the sugar tax should be complemented by increasing access to healthy food for the low income household. Despite arguments supporting imposition of a tax as a measure to reduce consumption of sugar and evidences from countries gaining success by introducing a sugar tax the health ministry of Australia discarded view of Dr.James Muecke to push for sugar tax (Beech 2020). The ministry has supported the strategy of encouraging people to shift to a healthy diet instead of increasing their shopping bills.
There is no doubt that sugar is toxic and excessive consumption of sugars leads to health problems like obesity and type 2 diabetes. Government needs to effectively intervene in the market in order to reduce consumption of sugar. One way to achieve this is to impose a tax on sugar. It though reduces consumption level, however has an adverse consequence for low income household. Such a tax policy should be complemented by increasing access of low income households to healthy food or subsidize healthy food production so that it can be affordable for low income people. Awareness campaign for encouraging people to shift towards consumption of healthy food is another way to reduce sugar consumption without having any adverse consequences on low income people.
Unintended consequences refer to unintentional or unforeseen outcome of an activity (Boudon 2016). Absisko which is a little town to the north of Artic Circle in Sweden. There is only one supermarket having more than fifty percent of sugary items and serve large and remote areas of the town. Moreover, Abisko is about 1 hour 20 minutes’ drive from Narvik in Norway. This fact indicates advantageous position of the supermarket in the town and nearby areas. Since, there are no other supermarket in the region and people have to cover a relatively large distance to reach to Narvik, the supermarket faces a very high demand for its product. High demand encourages the supermarket to keep larger quantity of sugary items in the store. Larger intake of sugary items may have adverse effect on health of the people in the region. The remote location and service people in larger and remote areas by the supermarket thus has unintended consequence of a larger quantity of sugary items in the store and associated adverse health effects.
aihw.gov.au 2017Australian Institute of Health and Welfare. A picture of overweight and obesity in Australia, Summary - Australian Institute of Health and Welfare. [online] Available at: https://www.aihw.gov.au/reports/overweight-obesity/a-picture-of-overweight-and-obesity-in-australia/contents/summary [Accessed 5 May 2020].
aihw.gov.au 2019 Australian Institute of Health and Welfare. Diabetes, Type 2 diabetes - Australian Institute of Health and Welfare. [online] Available at: https://www.aihw.gov.au/reports/diabetes/diabetes-snapshot/contents/how-many-australians-have-diabetes/type-2-diabetes [Accessed 5 May 2020].
Backholer, K., Sarink, D., Beauchamp, A., Keating, C., Loh, V., Ball, K., Martin, J. and Peeters, A., 2016. The impact of a tax on sugar-sweetened beverages according to socio-economic position: a systematic review of the evidence. Public health nutrition, 19(17), pp.3070-3084.
Beech, H. 2020. Health Minister rebuffs Australian of the Year's sugar tax push. [online] ABC Radio. Available at: https://www.abc.net.au/radio/programs/worldtoday/health-minister-rebuffs-australian-of-the-years-sugar-tax-push/11902914 [Accessed 5 May 2020].
Boudon, R., 2016. The unintended consequences of social action. Springer.
Browning, E.K. and Zupan, M.A., 2020. Microeconomics: Theory and Applications. John Wiley & Sons.
Castello, J.V. and Casasnovas, G.L., 2020. Impact of SSB taxes on sales. Economics & Human Biology, 36, p.100821.
Karl, E., Case, F., Oster, R. and Sharon, E., 2019. Principles of Microeconomics. Pearson.
Kelly, F. 2020. Dr James Muecke to use platform to push action on diabetes. [online] ABC Radio National. Available at: https://www.abc.net.au/radionational/programs/breakfast/dr-james-muecke-to-use-platform-to-push-action-on-diabetes/11902538 [Accessed 5 May 2020].
Kolmar, M., 2017. Principles of Microeconomics. Springer International Publishing.
Morley, B.C., Niven, P.H., Dixon, H.G., Swanson, M.G., McAleese, A.B. and Wakefield, M.A., 2018. Controlled cohort evaluation of the LiveLighter mass media campaign’s impact on adults’ reported consumption of sugar-sweetened beverages. BMJ open, 8(4), p.e019574.
West, A. 2017. The ethics of a sugar tax. [online] ABC Radio National. Available at: https://www.abc.net.au/radionational/programs/sundayextra/9131202 [Accessed 5 May 2020].
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