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What would be the impact of the sugar tax in the short run on the price and quantity sold in the market? Analyze and explain who bears the burden of the new tax. Illustrate your answer in a well-labelled diagram.

Written Assignment

This assignment requires you to explore a ‘real-world’ application of economics. Detailed instructions are provided below.

 

Background to the question

Academics and health organizations in New South Wales have been pressuring the government to introduce a tax on sugary drinks, known as “sugar tax”. Here are some published popular press articles about sugar tax from earlier this year:

https://www.theguardian.com/australia-news/2018/jan/10/sugar-tax-why-health-experts-want-it-but-politicians-and-industry-are-resisting (Links to an external site.)Links to an external site.

https://www.smh.com.au/national/time-to-introduce-a-sugar-tax-for-our-children-s-sake-20180430-p4zchh.html (Links to an external site.)Links to an external site.

 

QUESTION

Since these articles do not discuss the economics of a sugar tax, you have been hired as an economic consultant to provide analysis of the impact of sugar tax on the sugary drinks market. In your answer you should use appropriate models (and diagrams) studied in class.

Consider the market for sugary drinks. Assume that the market is competitive with many buyers and sellers, that sugary drinks are a homogeneous good and that market demand and market supply are linear and respectively downward and upward-sloping. The quantity purchased or sold is expressed in litres. At the current market equilibrium supply is more inelastic than demand. Assume also that the sugary beverage industry is a constant-cost industry in the long run. The government is interested in understanding the consequences of placing a sugar tax – $t per each litre of sugary drink produced – on the producers of sugary drinks. Note: there is no need to link your answer to externalities (lecture 10), but students are free to do so if they wish.

  1. a) What would be the impact of the sugar tax in the short run on the price and quantity sold in the market? Analyze and explain who bears the burden of the new tax. Illustrate your answer in a well-labelled diagram. (10 marks)
  2. b) The government is interested in the impact of the tax in the sugary drinks market in the long run. Analyse the impact and economic incidence of this tax in the long run in this competitive industry. Compare your answer to the short-run case discussed in part (a) and illustrate your answer in a well-labelled diagram. (10 marks)
  3. c) Do businesses prefer the situation where the legal obligation to pay the sugar tax is instead placed on consumers? In this case, consumers need to pay the government a tax of $t per litre of sugary drink purchased on top of the listed price. Motivate your answer for the market in both the short and long run. Support your answers with diagrams. (10 marks)
  4. d) Thinking more broadly, what will happen (in the short run) in the market for sugar-free beverages when sugary drinks are taxed? State any assumptions you make about the relationship between sugary drinks and sugar-free beverages and support your answer with a diagram illustrating the impact on the market for sugar-free beverages. Include in your discussion what determines the size of the impact on the sugar-free drinks market. (5 marks)

INSTRUCTIONS:

 

  1. In this assignment it is critical that you set up a clear and logical discussion.
  2. The written assignment is maximum 700 words long, not including reference list and diagrams. Your piece of work should be written in essay-style (with a brief introduction, body of the text where questions are answered, and a brief conclusion). Please use subheadings a-d to structure your answers. Students need to indicate the word count on the assignment itself.
  3. You should use appropriate economic concepts and techniquesto analyse the problem. Apply the relevant theories from the unit of study when analysing the problem. You should also make explicit any assumptions that you make.
  4. You must back up statements that you makewith logical reasoning and provide supporting evidence where possible.
  5. You need to use appropriate languageand submit a professional piece of work. Avoid slang or colloquial terms; check spelling and grammar.

 

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