This article is about the effect of taxation on sugary drinks
in the USA. America has the biggest problem of obesity due to the oversupply of
this demerit good. Demerit goods are goods that are considered to be
undesirable for consumers yet are overprovided in a market. It is overprovided as
it has negative externalities or because of consumer ignorance about its
harmful effects. Therefore, the soft drink market is an example of market
failure.The graph above displays the allocative efficiency of sugary
drinks which would be achieved when an optimal quantity (Q opt) would be
supplied at an optimal price (P opt). It is the
intersection of the marginal social benefit curve with the marginal social cost
curve. Firms over supply sugary drinks so the MPB is greater than the MSB (as
it affects society). Soft drinks are over consumed in the USA; with high demand
firms set a new equilibrium price for the new equilibrium quantity demanded.
Price moves from P opt to P1 as quantity
increases from Q opt to Q1. Due to this negative
externality there is a welfare loss, which involves a reduction in social
benefits due to misallocation of resources for soft drinks. The shaded area
above represents welfare loss.

In March 2015 the US governThe US government imposed a 10% tax on every ounce of sugary
drinks. This resulted in an upward shift of the supply curve, from S = MPC to
MSC (= MPC + tax). Therefore, negative production externality is corrected by
the optimal tax policy where the tax is imposed which is exactly equal to the
negative externality. Hence the new equilibrium price increases from P m to P opt resulting
in the decrease of quantity of soft drinks Q m to Q opt.

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The government attempted to make
several attempts in decreasing obesity but there are several disadvantages due to
the tax imposed. The disposable incomes of several individuals who continued to
purchase sugary drinks would decrease. Prices increase significantly so middle
and lower class people who continue to buy these will have lower living
standards. Secondly, indirect tax is a form of backsliding tax. The tax paid by
everyone is the fixed but the poor are more affected by this price change. Hence
rich and poor people have to pay the same price for a product but rich people
pay a lower proportion of their income in respect to poorer people. This is
certainly inefficient as it increases income inequality. Finally, for a smaller
quantity of product sold the price increases by a greater percentage. Consequently,
firms receive reduced revenues than before. It mainly affects workers in local
soft drink factories as they now receive lower revenues and may not earn enough
with such a low income. This may lead to greater structural unemployment; with
the limited skills they have they cannot seek other jobs thus increasing

Nevertheless, the indirect tax
imposed has advantages as the US government has increased revenue with
collected tax. The article also mentioned that the government planned to invest
this revenue on child care centres and increase funding on merit goods. It will
encourage more Americans to use merit goods as they are turning towards
healthier substitutes. Lastly, it helps the US government work towards their
goal of eliminating obesity in children. US currently has the biggest issue of
obesity worldwide, thus this was a measure to act against an important

In the short run the indirect tax
imposed on the sugary drinks was ineffective. Initially the demand for it
decreased due to a lower PED. The change in price of drinks, resulted in sales
decrease of about 10% nationwide. However, in the long run the taxation was
effective because consumers purchased substitutes which restored a high tax revenue
turnover from other drinks to the government. Sales of healthier drinks
increased and in fact, there was a rise of sales for bottled water by about
15.6%. Furthermore, this also helps the US government achieve their aim as this
taxation was to reduce obesity rates; especially for the young generation.
Certainly by the reduction of demand for these high sugar content drinks it
will lead to a greater fall in obesity rates in the population.  The benefits outweigh the costs when using
indirect tax as the welfare cost is corrected to benefit the general population
as soft drinks are no more over consumed.ment imposed an indirect tax on
all sugary drinks in the American market. For a soft drink can of 330ml ($1) it
accounts for an extra 12¢ and accounts for 68¢ for a 500ml bottle ($2).  


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