1. There are currently several localities considering a tax on sugary drinks e.g

Question

1. There are currently several localities considering a tax on sugary drinks e.g Berkeley, CA and Mexico already has a tax. A review of research, published in the New England Journal of Medicine on price elasticity for soft drinks has shown that for every 10 percent rise in price, consumption declines 8 to 10 percent. What does this say about the actual price elasticity for sugary soft drinks? If the goal is to reduce sugary soft drink consumption by 20%, how high must the tax be set? Do you think all the tax can be passed on to consumers? Explain carefully.

Explanation / Answer

The sugary soft drink elasticity will be of the same order. The demand for sugarry soft drinks is near linearly elastic.

To reduce by 20% the tax must be such that the price rise is by 20%. Thus a 20% tax rate wil do.

All the tax can be passed on to consumers only whe teh demand is inelastic that is demand curve is a vertical line.

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