In the media recently, there has been an increased effort by many state and local governments to try to improve the health of the constituents. One way that is popular among lawmakers is to put a tax on high sugar beverages. Cities like Berkeley, California believe that the consumption of sugary beverages is one of the leading contributors to the health issues that they are seeing in their community. Placing a tax on sugary beverages does reduce a negative externality; however, it fails to create an efficient market due to the elasticity of sugary drinks.
The main reason behind proposed soda taxes is that they will be able to correct an externality that is currently causing an inefficient market. Cities like Berkley, California believe that …show more content…
As shown in Appendix A model 1, the consumption of soda has set a market price that does not equal the marginal social cost of drinking soda. Due to this, the market is inefficient because it is operating with a dead weight loss and a negative externality. In order to attempt to correct the market and remove the inefficiency, the government in Berkley decided that they were going to impose a tax. The tax that Berkeley imposed is a pigovian or corrective tax. As shown in Appendix A model 2, the tax should cause the supply curve to shift left by increasing the price of sugary drinks, and thus shifting quantity demanded and hopefully removing the externality. Furthermore, the amount of tax imposed is not just a randomly created; it is derived from Model 1. When creating a corrective tax, it is important that the cost of the tax is equal to the distance between the marginal social cost curve and supply curve. As long as the cost of the tax is equal to the distance between the supply and marginal social cost, the negative externality should be reduced. By imposing a tax, it works to help reduce negative externalities by increasing the marginal cost to the consumer. Therefore, depending on how elastic or inelastic sugary beverages are in the consumers mind consumption should be
The main reason behind proposed soda taxes is that they will be able to correct an externality that is currently causing an inefficient market. Cities like Berkley, California believe that …show more content…
As shown in Appendix A model 1, the consumption of soda has set a market price that does not equal the marginal social cost of drinking soda. Due to this, the market is inefficient because it is operating with a dead weight loss and a negative externality. In order to attempt to correct the market and remove the inefficiency, the government in Berkley decided that they were going to impose a tax. The tax that Berkeley imposed is a pigovian or corrective tax. As shown in Appendix A model 2, the tax should cause the supply curve to shift left by increasing the price of sugary drinks, and thus shifting quantity demanded and hopefully removing the externality. Furthermore, the amount of tax imposed is not just a randomly created; it is derived from Model 1. When creating a corrective tax, it is important that the cost of the tax is equal to the distance between the marginal social cost curve and supply curve. As long as the cost of the tax is equal to the distance between the supply and marginal social cost, the negative externality should be reduced. By imposing a tax, it works to help reduce negative externalities by increasing the marginal cost to the consumer. Therefore, depending on how elastic or inelastic sugary beverages are in the consumers mind consumption should be