(Essay 87) Transfer graph in word document

Analysis of Effects of Sugar Tax

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Analysis of Effects of Sugar Tax

In the short run, a tax on sugar would have an increase in the price of sugar and a subsequent decrease in the quantity of sugar demanded. the price of the sugar shall increase from P1 to P2 whereas the quantity demanded shall shift from Q1 to Q2. The burden of the new tax shall be greatly borne by the society and mostly, the low class community shall be greatly affected. The low class community is affected because the sugar tax is a regressive tax and it takes a higher amount of money from low income earners. Briggs (2016) states that, sugary drinks often impose high external costs to the society which are reflected in the national health service. Thus, the social cost of the sugar tax shall be higher than the individual cost of sugar. As sugar is a good that has a high social cost, the graph below illustrates the impact of the sugar tax. At Q1 and P1, we have a free market price. However, at Q2, social marginal benefit (SMB) is equivalent to social marginal cost (SMC). Thus, the efficient level is at Q2.

The incidence of a tax is the final person who bears the financial burden of the tax whereas the impact of a tax is on the first person who pays it. In the long run, the impact of the sugar tax is on the manufacturer of sugar and sugary beverages. The duty is on the consumer of the sugar and sugary products, as this duty shall be added to the sugar and the price of sugar and sugary products shall increase. The sugar industry may be crippled as the profits made by the, manufacturer will decrease, wages will decrease and thus, the industry shall fall short of both labor and capital. With the decrease of income and profits, the purchasing power of individuals shall decrease and thus, the demand for other goods shall equally decrease. As compared to the short term consequence of increase in price and decrease in quantity, the long run consequences have quite adverse impacts. The general economy of the country shall decrease and poverty levels will increase. Therefore, the long term consequence of sugar tax is more critical than the short term consequence. As illustrated by the graph below, the consumer will pay higher taxes than the manufacturer due to incidence of the sugar tax.

Businesses do not support that sugar tax be the legal obligation of the consumer. This is because it will negatively affect their business. The sugar tax has a direct short term impact of increased prices. Most sugary products are perceived as luxury foods. According to Bødker, Pisinger, Toft & Jørgensen (2015), when consumers are given the legal obligation to pay the sugar tax, they shall shy away from purchasing sugary products due to increased price. In turn there shall be low demand for the commodity. With low demand for commodities, there shall be a decrease in the supply as most commodities have no market. Low profits are experienced by the business men and in turn, it may lead to closure of their businesses as their expenses shall be greater than their profits. Many employees will shift from businesses that solely rely on the sale of sugar as salaries and wages shall not only be delayed but they shall also decrease. As illustrated by the graph below, a tax of $t per liter of sugary beverage causes a decrease in consumption of sugary beverages as the final impact is felt by customers.

The increase in price of sugary drinks and beverages shall cause an increase in demand for the sugar free beverages. This is because, consumers shall opt for consuming sugar free beverages which are cheaper. In this theory, I am making the assumption that consumers shall still desire to quench their desire for beverages as they love beverages. As illustrated by the graph below, a decrease in demand for sugary beverages has an increase in demand for sugar free beverages whereas the quantity of sugar free beverages supplies increases and the supply of sugary beverages decreases causing fall of the sugar beverages industry.

References

Bødker, M., Pisinger, C., Toft, U., & Jørgensen, T. (2015). The rise and fall of the

world's first fat tax. Health policy, 119(6), 737-742.

Briggs, A. (2016). Sugar tax could sweeten a market failure: Britain has announced a tax

on sugary drinks. Countries should go further and target foods that have large carbon footprints, says Adam Briggs. Nature, 531(7596), 551-552.