Question

4. Taxes in Health, Healthcare, and Medicine (2.5 pts.)
a. Draw the market for sugary drinks
b. Label carefully and completely
c. Add a tax on sugary drinks – to the buyers
d. Show the impact of the tax on buyers and sellers and society
e. How would the effects of this tax differ if the tax were imposed on the sellers of sugary drinks?

Answer 1

(a) - (d)

In following graph, price (P) and quantity (Q) are shown vertically and horizontally, respectively. D0 and S0 are initial demand and supply curves, intersecting at point A with initial price P0 and quantity Q0. Initial consumer surplus (CS = area between demand curve and price) is area P0AD and producer surplus (PS = area between supply curve and price) is area P0AE. A tax on buyers shifts demand curve leftward to D1, intersecting S0 at point B. Price received by sellers falls to P2, price paid by buyers increases to P1, unit tax is (P1 - P2) and quantity is lower at Q1. New CS is area P1CD, new PS is area P2BE and deadweight loss (social inefficiency loss) is area ABC.

(e)

In following graph, price (P) and quantity (Q) are shown vertically and horizontally, respectively. D0 and S0 are initial demand and supply curves, intersecting at point E with initial price P0 and quantity Q0. Initial consumer surplus (CS = area between demand curve and price) is area AEP0 and producer surplus (PS = area between supply curve and price) is area BEP0. A tax on sellers shifts supply curve leftward to S1, intersecting D0 at point F. Price received by sellers falls to P2, price paid by buyers increases to P1, unit tax is (P1 - P2) and quantity is lower at Q1. New CS is area AFP1, new PS is area BGP2 and deadweight loss (social inefficiency loss) is area EFG.

Therefore, effects of the tax is the same whether it is imposed on the buyer or the seller.