The Essay Explores Taxes On Soft Drinks, Healthcare As A Public Good, And The Drug Demand Curve.

Assuming a sales tax (hypothetical scenario) of 25% on soft drinks the price will be increased to $2/litre. The price elasticity of demand for soft drinks is -0.95. a) How will the increase in the price of soft drinks affect the demand for soft drinks? How much additional revenue (for the government) will be raised by this tax?

Do you agree with above strategy to reduce consumption of soft drinks? Discuss Why?

The private competitive market is used to finance and provide most goods and services in Australia. Health care is an exception to this. Why should health care be an exception? Explain your answer.

Increase in Soft Drinks Price due to Tax

• Home health care for the elderly may be costly because caregivers must spend time providing care that they would have allocated differently.
• The share of health expenditure to indigenous people is Higher,on a per capita basis compared to non-indigenous, given much poorer health outcome data.
• Supplier-induced demand refers to All of the above
• The asymmetry of information between health care consumers and providers explains why health care providers may make decisions for patientsand is one of the explanations for market failure.
• Society’s Trade-off between Guns and Butter Point Butter Guns. X= 40 units of butter

The demand and supply of the drug, given a free market, are explained in each of the situations below. (Mankiw, 2008) Diagram Adapted from (Mankiw, 2008)

1. A change in technology that reduces the cost of manufacturing the drug

In the event that the cost of manufacturing the drug is reduces, the price of the drug will decrease. This will lead to an increase in demand for drugs. In the long run, the supply may change owing to a change in demand. The demand curve, thus, shifts, to the right.

Figure 1 Demand for Drug with a decrease in price

1. The availability of substitute leads to a decrease in the demand for the drug. Thus, the demand curve shifts to the left. In the example below, the demand has shifted from 50,000 units to 30’000 units.

Figure 2:The Effect of the availability of a substitute drug on TB Drug

Figure 3: Effect of greater resistance among consumer on demand for TB Drug

As consumer resistance towards the drug increases, there will be a demand for new drug, reducing the demand for the present drugs. The demand curve shifts to the left.

Figure 4: Effect of Increase in consumer’s ability to pay

An increase in Co-pay will reduce the consumer’s ability to afford or pay for the drug, in a general level. Hence, the demand for the drug will decrease as some low income groups may bot be able to afford the drug. Hence, The demand curve shifts to the left.

1. Co-insurance: An example of Out-of –pockets costs in co-insurance is the gap fees for doctors, surgeons, anesthesiologists that are billed above the threshold of payment decided by the insurance plan etc. (Australian Unity, 2018)
2. Deductible: An example of Out of Pocket deductibles are plans where an individual has to pay a minimum amount out of their own pocket before the plan kicks in. Pregnant women often have to pay booking charges for their doctor before the insurance is applicable.(Gunja, Collins, & Beutel, 2016)

iii. Exclusions: Doctor visits and prescription drugs can often be considered as out-of-pocket costs. (Australian Unity, 2018)

1. Flat rate benefit: Travel health insurances typically tend to be flat rate insurance. However, in such plans , pharmacy costs are not included.(Allianz Global Assistance, 2018)

Q4)  ‘Price elasticity of demand’ is defined as the the “degree of responsiveness of a change in demand to a change in one of its determinants while other determinants remain unchanged.”

The demand for sugary drinks is would be expected to change as follows:

Price Elasticity of Demand = Percentage Change in Demanded Quantity / Percentage Change in Price (Mankiw, 2008)
-0.95 = % Change in Quantity Demanded/ 25

-23.75 = % Change in Quantity Demanded
The demand for sugary drinks is expected to decrease by -23.75%.

The revenue generated by the government will be an additional 25% .

1. b)  Obesity is becoming an increasingly common problem in Australia. Obesity leads to other problems like cardio vascular diseases which can have a significant impact on the healthcare system of the country. (Australian Institute of Health and Welfare, 2017)Thus, there are public health benefits to taxing sugary drinks.

In the event that taxation for sugary drinks go though, it is possible that the consumption of sugary drinks may reduce as demand would be lower following an increase in price. If the taxes are higher, then the manufacturers would be forced to offer healthier options such as artificially sweetened drinks. This may change the consumption patterns among consumers.  (Brownell, et al., 2009)

The government may also, gain an additional source of revenue.

Imposition of a tax on sugary drinks has been recommended by experts too. Hence, it is a good choice from the point of view of public health and economics to impose taxes in sugary drinks.  (Brownell, et al., 2009)

Impact of Tax on Soft Drinks Demand and Additional Revenue for the Government

In a simple supply and demand model, an increase in taxes will lead to an increase in prices and shift the demand curve to the left.

Figure 5 Source: Adapted from (Mankiw, 2008)

Q5)

Health care is often, a basic human need and not a choice. According to Salisbury (2016) healthcare is a public good because it is not excludable and in no rival. Non excludable refers to healthcare being an good that is needed by all. No person can be excluded by choice from the provision of health care. Non rival refers to healthcare being a need that cannot be satisfied or replaced by another good. The consumption of healthcare does not decrease utility for other goods or services and vice versa. Hence, the economic resources dedicated to healthcare either neither avoidable nor should they be excluded from the budget of an individual or a community.

Moreover, healthcare is inherently tied to human capital. Human capital is an important aspect that fuels economic development of a country. Hence, healthcare provisions can be justified as a investment as it may help boost the productivity of the human capital of the country.

Salisbury, (2016) demonstrated that it is possible for healthcare can be Pareto efficient i.e the administration of public healthcare does not necessarily have to take away from other resources that are provided to the public.

The provision of healthcare can also, be linked to inequality. For example, in Australia, the Aboriginal communities have the worst outcomes, in terms of health. These communities are , also, the communities that have the lowest incomes, lowest education and located in the remotest part of the country.  (Turrell, Stanley, Looper, & Oldenburg, 2006) In a free market, the ability of a patient decides their ability to purchase resources. In such a situation, people with higher incomes will over receive priority over those who have a lower ability to pay. A healthcare system where health care is treated like a public good, will tend to reduce those inequalities. Additionally, if the healthcare system has a mandate to serve every citizen, then it is possible to provide healthcare, even in the remote parts of the country. In a free market system, health care facilities may not reach these parts of the country, simply because the cost-benefits economics may not make it feasible.

References

Allianz Global Assistance. (2018). What is Overseas Visitor Health Cover? Retrieved from Allianz Global Assistance: https://allianzassistancehealth.com.au/en/visitors-visa-ovhc/how-ovhc-works/?gclid=Cj0KCQjwttbWBRDyARIsAN8zhbLpjhwyp2MNtN_fQRm7S0S70VUtG4Qlo9ryj3K3ecvtW4IYao1C7IEaAupuEALw_wcB

Australian Institute of Health and Welfare. (2017, November 24). An interactive insight into overweight and obesity in Australia. Retrieved from Australian Institute of Health and Welfare: https://www.aihw.gov.au/reports/overweight-obesity/interactive-insight-into-overweight-and-obesity/contents/how-many-people-are-overweight-or-obese

Australian Unity. (2018, April 2). How to stop out-of-pocket hospital costs from hurting. Retrieved from Australian Unity: https://www.australianunity.com.au/health-insurance/existing-members/wellplan-online/using-your-cover/how-to-stop-out-of-pocket-hospital-costs-from-hurting

Brownell, K. D., Farley, T., Willett, W. C., Dr.P.H., B. M., Chaloupka, F. J., Thompson, J. W., & Ludwig, D. S. (2009). The Public Health and Economic Benefits of Taxing Sugar- Sweetened Beverages. The New England Journal of Medicine (361), 1599-1605.

Chauhan, S. (2009). MICROECONOMICS: Theory and Applications, Part 1. New Delhi: PHI.

Gunja, M. Z., Collins, S. R., & Beutel, S. (2016, March). How Deductible Exclusions in Marketplace Plans Improve Access to Many Health Care Services. Retrieved from The Commonwealth Fund : https://www.commonwealthfund.org/publications/issue-briefs/2016/mar/deductible-exclusions

Mankiw, G. (2008). Principles of Microeconomics (5th ed.). Mason Ohio: Cengage Learning.

Salisbury, S. M. (2016). Why Health Care Should Be Universal: Using the Principles of Public Welfare Economics to Make a Case for Universal Health Care Coverage. Undergraduate Research Journal, Indiana University. Vol 16, 57-67.

Turrell, G., Stanley, L., Looper, M. d., & Oldenburg, B. (2006). Health inequalities in Australia: morbidity, health behaviours, risk factors and health service use. Canberra, Australia: Queensland University of Technology; Australian Institute of Health and Welfare.