Wednesday, April 27, 2016

Incidence of the Soda Tax

Paul Krugman comments on an interesting debate between Bernie Sanders and Hillary Clinton:
So Sanders and Clinton are arguing about soda taxes — Clinton for, as a way to raise money for good stuff while discouraging self-destructive behavior, Sanders against, because regressive.
Let’s concede the presumption that low income households spend a greater share of their limited income on Coca Cola than high income households but take a look at the incidence of a tax:
A tax incidence is an economic term for the division of a tax burden between buyers and sellers. Tax incidence is related to the price elasticity of supply and demand. When supply is more elastic than demand, the tax burden falls on the buyers. If demand is more elastic than supply, producers will bear the cost of the tax.
Of course this is the standard competitive model. Let’s assume such a model with a horizontal supply where the marginal cost of making and selling a bottle of Coke is $1. Imposing a tax equal to $0.20 per bottle will raise the price of a bottle of Coke to $1.20 a bottle with the full incidence on consumers. One could argue, however, that Coca Cola is closer to a monopoly. Let’s imagine in your town that the demand for soda is given by P = a – b(Q), where P = price, Q = quantity, a = 3, and b = 0.01. The competitive market solution puts the price before new tax at $1 and Q = 200. But if Coca Cola has a monopoly, then it raises the price to $2 by reducing Q to 100. In this monopoly model, a $0.20 tax raises the price from $2 to $2.10. In other words, part of the incidence of the soda tax would be borne out of profits rather than simply from consumers. Of course, I’m assuming a simple monopoly model with a linear demand curve. I’ll leave this question of who bears the actual incidence of a soda tax for the capable economists on either Team Bernie or Team Hillary.


Barry Murphy said...

Linear demand can be misleading. Baby Varian shows that with iso-elastic demand the monopoly price can change in the opposite direction to the tax.

ProGrowthLiberal said...

Barry - valid point. If the price falls in response to a tax increase, then none of its incidence is borne by the consumer.

Myrtle Blackwood said...

Coca Cola is a real tax on our habitat. So it is appropriate to introduce heavy financial taxes on the producers and consumers of such goods. While Mao Tse-Tung saw no inconsistency between China, Communism and Coca Cola he didn't see the obesity epidemic or the oceans full of soda bottles.

Kaleberg said...

I think they're using the example of tobacco. Higher cigarette prices have been an important factor in cutting smoking, especially among those of limited means. There's been a multi-pronged assault on smoking for decades now with higher taxes, social pressure, advertising bans, health warnings and so on. We have fewer smokers and less lung cancer to show for it.

There has been a more recent war against sugary soft drinks, particularly carbonated ones. It has used similar tactics, social pressure, health warnings, removal of soda machines from schools and now a proposed tax. We've already seen a decline in soda consumption, though whether it will cut the incidence of type 2 diabetes remains to be seen.

Sean B. Cash said...

"One could argue, however, that Coca Cola is closer to a monopoly."

That is a mighty strong assumption. Coca Cola's 2015 market share was huge to be sure (48%), but one might argue that the fringe is still highly competitive.

Unknown said...

Wine is a real tax on our habitat. It is not like you find a lot of biodiversity in a vineyard or that much actual food value per acre. Nor is it at all clear that all the barley that ends up in a bottle of 30 year old Scotch couldn't have been better devoted to feeding the poor. And lets not even get started with the waste associated with providing the meat to a $125 a plate meal at Ruth's Chris Steak House. BEFORE the wine and the Scotch.

Yet I didn't see Michael Bloomberg proposing a tax on liver damaging Single Malts and heart attack inducing 16 oz steaks smothered with sautéed mushrooms and onions accompanied by some lobster in garlic lemon butter.

Most of this boils down to the same ol' same ol': the poor are underserving of pleasure and leisure. Bloomberg paying hundreds of dollars for an orchestra seat at the ballet is just his and his class's just deserts. A poor person buying hours and hours of dreams with a $2 lottery ticket is just evidence that these people have no sense of the value of money. Yet who gets more actual pleasure per dollar?

Little kids like soda and candy. They also like first run movies. And toys from top end stores. And vacations that include playing the snow at Vale and St. Moritz. But not everyone can even afford a movie ticket more than every couple months. But they can afford a bag of candy at the Dollar Store. Or eight ounces of Coke in a glass poured from a 2 liter bottle that costs 88 cents on sale. But why NOT foist a 3 cent an ounce tax on that?

Because coercing the poor via consumption taxes to behavior the rich would never enforce on themselves or their own children is depraved. At least until we see a $10 an ounce tax surcharge on that shot of Johnny Walker Blue Label and $15 an ounce on that Porterhouse at your steakhouse. I mean it is not like Scotch and fatty (oh I mean 'marbled') steak is good for you.

Myrtle Blackwood said...

Re: "...Most of this boils down to the same ol' same ol': the poor are underserving of pleasure and leisure."

I do agree with you that sweets/lollies are a real joy for children, as they were for me when I was young. But a lot of the calories from them were burnt off foraging for the glass drink bottles to take to the local recycling depot to get the money to pay for the lollies. Therein lies a possible solution to the two problems mentioned. No waste and contamination with plastic containers, and a mechanism to help fend off diabetes in children.