9/26/2009

Elasticity of Soda

This article discusses, among other things, the debate of whether the government should impose steep taxes on soda to reduce consumption and thus weight gain. Some argue that because there are so many substitutes for soda that can be just as harmful and not lead to weight loss that it would not be effective. While I am not discussing the effectiveness of the policy, I feel that soda is fairly elastic so I do think that more and more people will consume less soda. I don’t know what they will turn to, but if they were drinking soda I can’t imagine that they would switch to something that would help with weight loss. At any rate, I feel that soda will show to be elastic and if prices rise, then people will look to other options that may be substitutes, such as energy drinks, or high calorie juices. On the flip side though, I do know people who would go crazy if they didn’t have their daily fix. To these people, I don’t think it really matters what the price is, they want their fix so to them, soda is very inelastic.

10 comments:

Brooklyn said...

The government and it's crazy ideas, as if a tax hike on soda would make Americans more healthy. I think you are right by stating that soda is elastic and has many substitutes. I would imagine their are probably many more unhealthy substitutes than their are healthy ones. On the other hand you said some people need their fix so their would be a portion of the market that would feel that soda is an inelastic product.

Dr. Tufte said...

Another awesome and timely post ...

The whole point of taxing a specific product (that's called an excise tax) is that it's demand is inelastic. That way people will continue to buy the product at the new high price, without creating serious repercussions for the people employed on the supply side. The classic examples are cigarettes and booze. The theory is called tax incidence; incidence is who actually pays the tax rather than who is labeled as being taxed.

Unfortunately, I think this is a case of busybodies within the government using the tax system to further their moral position. These people need to be whacked on the knuckles with a big stick: taxation is about funding government, not punishing people who do things you don't like.

skylar said...
This comment has been removed by the author.
skylar said...

It is not so much the soda that people crave its the ingredients inside the soda that cause the problems like sugar and caffeine. People can always find more of those things in other products. Take my Father for instance, he quite drinking coke and made the risky jump to energy drinks thinking they were better. We all know that is not the case. Soda is elastic.

Jonathan said...

I believe if there was a tax on soda, the demand of soda would be inelastic for one reason: people won't notice the price increase. Think about it, 10-15 years ago, how much did it cost to go to a gas station and buy a 20 oz soda? 50-60 cents? If you went now how much would you pay? Over a dollar. Has demand decreased because of this price increase? No. I don't feel like the government needs to put a tax on soda because its a stupid ploy to make money and cover it by saying that it is for the health of the nation. But I do believe if it did happen the demand would be inelastic.

Brendan said...

I agree with the idea of trying to make Americans more healthy. We are a lazy and unhealthy nation, and it shows in the overweight problem occurring all around us. However, it is not the responsibility of the government to regulate our health. We are not communists. Imposing a tax may affect purchase decisions of soda in the short run because soda does have many substitutes. However, in the long run, soda is a relatively inelastic item in my opinion, and people will always want a coke.

Paige said...

More tax on soda? I have to admitt that I am a huge soda fan. Soda is inelastic to me. I work at a restaurant where people pay 3 dollars for a soda! It doesn't matter whether the price increases or not, me and other consumers are going to buy soda no matter what. Sure their are other subsitutes for soda. But if someone really wants a soda they are going to get it no matter if it has a slightly higher price or not. I don't think it is fair to say soda is "always elastic." Their are a lot of Americans out there that would probably pay an arm and a leg for a soda.

Alec Myres said...

I think a core issue has been missed here. Rather than getting into circuitous arguments about what governments should and shouldn't do, focus on the economics. Sugar drinks (be it from cane sugar or corn derivatives) are made artificially cheap due to agricultural subsidies. Thus, the products are artificially made cheaper than the true market price, and people consume more. Credible proposed taxes or bans should be levied against sugar drinks in general. I make no arguements about exactly how this should be done (per ounce, over a certain size, etc.). Valid economic analysis should also consider consider externalities: excessive sugar consumption habits lead to higher future medical costs, which consumers fail to internalize. Other people (through higher insurance rates or government taxation) must bear these costs. A "soda" tax is an attempt to balance these classical market failures.

JP said...

This discussion of a soda tax is quite interesting. Since this post there have been some real world examples of a soda tax. In 2013 Mexico City imposed such a tax, and there are studies (http://time.com/4069711/mexico-slim-soda-tax/) that show the tax has reduced consumption and led to improved health for Mexicans. Earlier this year Berkeley, California became the first U.S. city to pass a soda tax, and one Cornell-University of Iowa study (http://www.news.cornell.edu/stories/2015/08/study-berkeley-soda-tax-falls-flat) shows that so far, the tax (placed on bottlers and distributors) has largely not been passed on to consumers.

There are two points I want to draw from previous comments. First, Dr. Tufte pointed out that this is a “case of busybodies within the government to further their moral position…taxation is about funding government, not punishing people who do things you don’t like.” This tax is obviously not an idea to provide large revenues to governments. It seems that typically discussions on this soda tax center around health issues, and as Dr. Tufte said, are used to further people’s moral positions. Discussions about a soda tax do not originate with The House Ways and Means Committee or the Senate Finance Committee; such discussions are heard from mayors and health officials. Part of the reason for this is that, thankfully, a national soda tax is not being proposed, but the origination of these discussion also points out that it’s not an issue of good tax policy, but rather an issue of health. The fact that we’re able to try out the soda tax in some cities (and that it’s not being imposed at a national level) creates an excellent environment for research and study. Prices of soda in Berkeley were recorded before and after the tax in local grocery and convenience stores, and those recordings show that prices have not changed much due to a low pass through of the tax. So tax revenue for Berkeley may have increased, but demand has not changed because there has not been a price change for consumers. Store managers in Berkeley need to consider their market environments and make sound pricing strategy decisions. The authors of the study pointed out that managers need to be concerned about cross-border shopping because it is a city tax.

The authors also highlight the second point I like, made by Alec Myres, that the tax is an attempt to internalize negative externalities. Economist John Cawley of Cornell said, “There is an economic rationale for taxes when consumption of the good imposes negative externalities, and obesity costs taxpayers billions each year in medical care costs in the U.S…to the extent such a tax helps internalize the external costs, there is an economic rationale for it.” Future studies will hopefully show how well a soda tax helps internalize the negative externality of high medical costs. For now, it is interesting and helpful to see how the tax works in foreign and domestic cities.


Dave Tufte said...

JP:

You went way back for this one, didn't you?

FWIW: the Alec Myers in the previous comment is not a class member, but someone out in the ether that found our class discussion interesting. I'm not particularly in favor of his suggestion of a tax on sugary drinks, but I do think he's right that subsidies for sugar are a big problem. I'd just go the other way and argue that instead of taxing the consumer, we ought to stop subsidizing the producer.

Back to JP:

I do get what you're saying about this coming from public health concerns rather than revenue concerns.

What bugs me is that we have this coercive system in place to raise revenue through tax collection. It isn't pretty. Let's call it the old cudgel for the old problem. Then we have people who get concerned about a new issue (like sugary drinks). And their response is "we already have this cudgel laying around, and it's not being used all the time, so let's go hit some new people with it". It's the old cudgel for the new problem that bugs me. I think that predisposition is ripe for abuse.

I am also a big fan of JP's point that it's good to try different policies in different locations before we roll them out more broadly.