Some great microeconomics from the NYTimes this morning (Proposed tax ...):
The group’s ["a team of prominent doctors, scientists and policy makers"] review of research on the topic, appearing in The New England Journal of Medicine, was released on Wednesday, the same day that Senator Max Baucus, the Montana Democrat, made public his health care reform plan, with an estimated cost of $774 billion over 10 years. The Baucus plan would be paid for by an array of taxes and fees on high-end group insurance plans, drug and medical device makers, and other sources, with no mention of any tax on sugary beverages.
The scientific paper found that a beverage tax might not only raise revenue but have significant health effects, lowering consumption of soda and other sweet drinks enough to lead to a small weight loss and reduced health risks among many Americans.
The study cited research on price elasticity for soft drinks that has shown that for every 10 percent rise in price, consumption declines 8 to 10 percent.
John Sicher, the publisher of Beverage Digest, a trade publication, said that a two-liter bottle of soda sells for about $1.35. At 67.6 ounces, if the full tax was passed on to consumers, that would add 50 percent to the price. A 12-can case, which sells today for about $3.20, could rise by $1.44, a 45 percent increase.
Note that the full tax can't be passed onto consumers. When this is attempted, the higher price will create a surplus (excess inventory). The price will fall until the surplus goes away and the new price will be above the original price but below the full-tax-passed-on-to-consumers price.
Also, here is a quick quiz. The initial implementation of the tax will raise revenue. But suppose we double the tax afterwards? Will revenue rise (much)? Drop your answers in the comments section and I'll give you a grade at the end of the day.
