Evaluate the decision of the city of

Washington D.C. to increase taxes on

sugary foods by 8%
Do the following question (2 to 2.5 sides)

Possible analysis
Indirect taxes (%)
Use the example given

Possible evaluation
1)Stakeholders
- change to P and Q
- changes in consumer and producer surplus
- burden (incidence) of taxation ( use your 10 marker for ideas)
2) Could consider min price as a tool to reduce consumption.
3) Further stakeholders evaluation such as luxury goods manufacturers that do not market
cheap sugar rich food but will be affected unfairly due to the tax being widespread.

Work
The city of the District of Columbia makes the decision to levy increased Value Added Taxes, a
form of indirect taxes at a rate of 8% upon sugary foods. Value Added Taxes are an ad valorem
tax on producers, they are a tax on consumption and are a source of revenue for the state, in
this instance the City of Washington D.C. It is paid by consumers but levied on businesses.
The price that customers pay for goods and services already includes value-added tax. In this
instance the business selling the sugary foods collects the VAT and gives it to the city of D.C. .

As illustrated in Figure 1 “The Impact upon Supply and Demand Curves as a Result of the
Decision of the City of Washington D.C. to increase taxes on sugary foods by 8%” there are
several outcomes that occur as a result of the decision being made to increase taxes on sugary
foods. The initial supply curve S1’s price elasticity of supply is already relatively elastic as a
result of the way in which sugary foods are produced. Without getting further into that, as a
result of the VAT tax S2 the curve representing supply after the implementation of increased
VAT taxes it shifts inwards as a result of a decrease in producers willingness and ability to
produce said good, in this instance sugary food. Additionally, the supply curve also becomes
steeper (more inelastic) because the higher the initial price for a good the higher the tax will
be on it as VAT is taxes as a percentage. The Demand curve D is relatively inelastic as the
general public’s demand for sugary foods is high as they are cheap, readily available and
mildly “addictive”. Essentially, the consumer’s willingness and ability to purchase them is
relatively unchanging when a price increase or decrease occurs. In this example, the result of
the tax is a relatively small decrease in the quantity demanded as it falls from Qe at equilibrium
to Q1 this is likely a result of Demand curve being inelastic in nature and the supply curve not
decreasing in elasticity too drastically. The price increases somewhat significantly from Pe to
P1 this is a result of the supply curve shifting in addition to it becoming more inelastic.

Consumer surplus is defined as the additional benefit/utility received by consumers by paying

a price that is lower than they are willing to pay in this instance the utility or benefit from
purchasing sugary treats at said price. The “bargain”. The producer surplus is the additional
benefit received by producers by receiving a price that is higher than the price they were
willing to receive in this instance, the producers being the vendors in Washington D.C. . The
impact of the tax hike of 8% on sugary foods can be seen in Fig.2 “The Decision of the City of
Washington D.C. to increase taxes on sugary foods by 8% effects on Consumer and Producer
Surplus”. The Consumer Surplus in relation to S1 prior to the tax increase and the shift in the
supply curve is considerably large, far bigger than the producer surplus. Then upon the tax
being introduced the consumer surplus decreases in relation to its prior size. The producer
surplus increased significantly indicating that the consumer is getting less “bargain” after this
increase in tax. The producer surplus not only increases in size but also increases in relation
to the consumer surplus indicating that the producer is getting more utility. All of this is to say
that the tax by the city is working as intended. More consumers are getting less utility out of
each item, decreasing their willingness to pay.

The next factor to consider is the tax burden. When one considers Fig. 3 it can be observed
that the tax burden on consumers is far greater than that of the tax burden on producers. All of
this is to say that once again the City of Washington D.C.’s move to increase taxes to likely
decrease the consumption of sugary foods is largely effective. Consumers are suffering not
only in the decrease in amount of utility and bargain they are receiving but they are paying
more of the tax burden. The question that must be asked now is are all of these tools effective
in judging the actual impact of the taxation. Based on these indicators one would assume that
the tax increase is successful in achieving its objective however a measure that would be more
definitive is cross price elasticity of demand.

Cross price elasticity is the measure of the effect of changes in the price of one good on the
quantity demanded of another good. This reflects the fact that the quantity demanded of goods
is dependent on not only its own price but also the price of other "related" goods. In this
instance we could compare the demand for “healthy” food, say produce, compared to sugary
food. Without knowing the price of a specific substitute and it being difficult to find a definitive
“price” for sugary food it is impossible to carry out the exercise of cross elasticity of demand
with a degree of certainty that using it will ensure a more accurate evaluation of the situation.

However, something that could also be considered is the possibility of a minimum price
control being implemented upon sugary food. While this may be challenging to implement
across a wide variety of products if one graphs it and observes the results of such a
government intervention. Should this occur the quantity demanded would decrease as
illustrated by the graph as it moves from Qe to Q1. However, not by much due to the
inelasticity of sugar foods as a good. Even a higher minimum tax as represented by Pmin2
would mostly result in an increase in excess supply, another hassle for the city of Washington
D.C. . As the potential need for a quota is introduced.

Taking into account the minimum price mechanism it seems that the City of Washington D.C.
‘s best tool for decreasing demand for this unhealthy product is increasing taxes. It shifts the
burden to the consumer, the consumer’s surplus reduces, and ultimately even if the decrease
in quantity demanded isn’t remarkably significant it is still a decrease. This solution isn’t
without potential problems that may arise. For example luxury brands that sell sugary food at a
high price may feel hurt by this as they aren’t causing as much harm as say soda for a
consumer. Additionally their demand curves may be less inelastic resulting in an even greater
decrease in the quantity demanded and a significant decrease in the amount of their product
purchased. Which can be seen in Fig. 5 as the price increase has a significantly larger negative
impact on the Quantity Demanded from Qe to Q1; this is a result of consumers having less
willingness to purchase luxury goods when their price increases significantly.

In Conclusion, the City of Washington D.C. ‘s decision to tax sugary food is somewhat effective
in reducing demand but is harmed by the inelasticity of demand for sugary food, despite the
price hike and burden being placed or shifted onto consumers they are still purchasing the
unhealthy food.