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Sugary Tax Essay Assignment Help | College Homework Help

Question one

In consumer theory in Economics, what is the difference between a necessity and a luxury good? What is the likely difference in the tax revenue obtained from a tax imposed on necessity versus a luxury good? Illustrate the use of appropriate figures.

There is a huge difference between necessity and luxury goods. Luxury goods involve a good which its demand increases more than the proportionality as income increases. The expenditure on the gods becomes a greater proportion with regards to the overall spending.  The luxury goods are completely different from the necessity goods since in the case of necessity goods demand increases proportionally less than the income. Luxury goods can also be referred to as superior or Veblen goods. In economics, necessities tend to have demands which are inelastic/. On the other hand, luxuries have elastic demands. Whether a good is a necessity or a luxury greatly does not depend on intrinsic properties of the goods but rather on the buyer’s preference.

Figure 1 Demand for Luxury vs. Necessity goods (Lockamy III, 2017)

Demand for Luxury Vs. Necessity Goods

Necessity goods are deemed to be essential in life since people cannot live without them. At any given point, consumers will have to purchase the necessity gods, since they are very significant to their livelihoods and a certain amount of these gods have to be bought no matter what, even despite increases in price. On the contrary, luxurious goods are bought by persons wh0o can afford them (Jacobs & Chase, 2017). They are relatively more expensive, and a buyer has to have enough resources for him/her to get to buy them, where they are not compulsory for purchase. The demand for luxurious gods is determined by several factors such as the affordability; the tends in the market, the impact and the budget of an individual. O the hand, the necessity goods are compulsory to have, where any person despite his/her special class and ability to afford often has to buy them. Some of the luxurious goods include ships, entertainment, expensive attires and also luxurious goods. Necessity goods on the other hand include foods, utilities, Education, transportation, medicine and health care amongst others.  As income declines, the necessity goods are the last things a customer stops buying (Greenberg, 2017). Alternatively, as income increases then customer uses; power budget in buying the necessity goods. In the case of a recession, the demand for necessity goods decision as much as the case for luxurious goods (MUTAI, 2017). This is since most customers then prefer to drop the luxuries and focus on basic goods. Definitions for both them often tend to be more complex depending on the context of study.

What is the likely difference in the tax revenue obtained from a tax imposed on necessity versus a luxury good?

In most cases, the luxury goods are taxed more tam the necessity goods because of the different needs and want by society. Goods such as alcohol, luxury cars have additional taxes since they are not very critical and important as the other goods (Atwal & Williams, 2017). The same happens to some sources such as gambling, expensive insurance services among others. With regards to the necessity goods, there are very critical to people’s livelihoods, where people cannot do without them (Oei & Ring, 2017).  There is policy rational with regards to taxing some goods heavily than others, mostly based on what the persons would do without the country of origin of these luxurious gods and whether the taxes will have an impact on the government operations, but still consider the wellbeing of the people.


Question two

 Why do you think Adam Smith preferred to impose a tax on luxury goods?

`           According to a Scottish economist, Adam Smith, sugar rum and tobacco are not necessary commodities and hence need to be taxed more than the necessary commodities. He is of the opinion that these are proper subjects of taxation. According to him, the taxation is not for improving health, but since they are not the most critical products that people need and that people can survive without using them. The luxury gods have Veblen effects, where the consumers have the willingness to pay a higher price for the functionality which arises from the desire of signaling wealth (Oei & Ring, 2017).  This means that even after the taxation, the consumers would still buy the commodity since they afford it.  A change  in the price of the proposed goods by Adam , means that it will add its value in the market  and hence meaning that it is  optimal  to tax these particular at a higher rate  as way of dealing with persons who  can afford them , yet have  an advantage of incurring high taxes to the government in  place.

It is also evident that taxiing these luxurious commodities will have a critical advantage over the sumptuary laws.  From the view of Adam, it is also evident that by undertaking their type of taxation, then conspicuous consumption is discouraged. Therefore the government can be able to regulate how [people consume specific products, through taxing the high luxurious commodities and ensuring to lower the taxes of the necessary commodities, as way of bringing a balance on the two, and ensuring that the most important commodities are lowly taxed, whereas the luxurious commodities that are most necessary to people such as sugar and Rum, on the other hand, get more taxation.

Why do you think Adam Smith preferred a tax on ‘objects of almost universal consumption’?

The reason behind Adam Smith preferring gods of almost Universal consumption to be taxed is since everyone in a given nation will have to consume them, though they are necessary for consumption, they include products like sugar and alcohol. By taking these products then the government subsidizes other critical products such as medicine and normal food which are important for the livelihood of the people (Greenberg, 2017). The reasoning of Adam is based on the fact that some goods are essential for human consumption, whereas others are just luxurious, and are not compulsory forth consumption.  According to Adam, it is apparent that the goods which are not very critical for survival, or the basic needs which are however used all over the world need to be taxed more.  This is since it would be unfair to tax commodities that people cannot live without yet there are many products that through taxing the livelihoods will still continue with little negative effects to the producers and consumers.

 Question 3

Why would a tax on sugary drinks ‘lead to people eating fewer fruit and vegetables and more salt’? Illustrate the use of appropriate figures.

 Tax on sugary foods would lead to reduced consumption of s fruits and vegetables, and instead, lead them to have more salt. There are potential effects of taxing on sugar in terms of eating habits and health. By taxing sugar then the calorie intake of the consumers would be greatly reduced. This includes some of the vegetable and fruits (U.S. Department of the Treasury, May 28, 2013).  The taxes are effective since they target an ingredient across all the products, hence prevent people from substituting from a taxed commodity to an untaxed commodity.  According to the majority of researchers on this particular case, there is no distinguishing between natural sugars, e.g. those which are found in fruits vegetables and milk used to flavor cakes, pies, beverages, and other products (Manning & Soon, 2016). Studies have been conducted on how consumers would respond to the changes in the different products, which include fruits and vegetables and how the consumers would substitute between food categories when the process in one category changed. From the studies, taxing sugar could lead to a significant impact on consumption on any product that has sugar in it.

Figure 2 Effects of sugar Taxation on kids

Effects of Sugar Taxation on Kids

From the study, it is also apparent that specific taxes on the product have had larger effects on the nutrition in specific ways. For example, 20% of tax on sugar would mean a reduction in the calorie’s intake by more than 18%. The same taxation on soda would decrease the intake of calories by around 5%. This suggests that nutrient specific taxes have a very critical effect on healthier purchasing behavior among clients (Atwal & Williams, 2017). It is also evident that these taxes have been linked with controlling various consumptions, more so in the US, since some of these nutrients are the major leaders in having adverse effects and conditions such as cancer, obesity, and diabetes among many other rampant illnesses across the globe caused by the type of nutrient consumptions.

Figure 3 Sugar Tax Chart

Nelson Sugar Tax 2017

Illustrate with the use of an appropriate figure what the deadweight loss from the imposition of a tax would look like. In the case of sugary drinks, who would likely suffer a greater deadweight loss – the consumer or producer?

Deadweight loss involves a cost to society which is created by inefficiency in the market. It can be as result of inefficient allocation of resources, most involving price controls, high taxation, and price ceilings. In the case of the high sugar taxation, it is therefore clear that it can result to a deadweight loss, since the high taxation, leads to inefficiency of the products in the market (U.S. Department of the Treasury, May 28, 2013). The producer is most likely to suffer a greater deadweight loss as a result of the high taxation since there will be reduced sales, and consequently reduced revenue which is as a result of the decreased sales in the market.

Figure 4 Deadweight Loss (Stadtler, 2015)

DeadWeight Loss

The reason as to why the companies are most likely to suffer deadweight loss from the taxation is since people will be prevented from making the purchases   they would have otherwise made since the final product will have been higher and above the equilibrium market price. The burden of the high taxes will be split between the producer and the consumers. Therefore, the producer will have lesser profit from the commodity, and ultimately the customer will have to pay a higher price for this product (MUTAI, 2017).  As a result, there is a lower consumption of the product, hence reducing the overall benefit on the consumer market. Consequently, the producer, I.e., the company is highly unlikely to get as much profit as it was prior to the taxation.

Figure 5  Negative Consumption (Jacobs & Chase, 2017)

Negative Consumption

The high taxation on the sugary products will create a market inefficiency of the product since the produces will have been adversely affected. In this case, the gods will be overvalued, where the customers and the producer suffer the consequences. This may prevent consumers from making purchases in this particular, market or alternatively purchase lower quantities than they were making in the past before the taxation (U.S. Department of the Treasury, May 28, 2013). This is a way of reducing the spending in this particular category as a way of compensating for the highly priced commodity.

It is therefore evident that the adverse effects would be on both the consumer and the producer.  However, the person to suffer most is the producer due to the fact that the company is profit oriented, meaning that the taxation may affect the profit margin affected by the company. With regards to choices on the market space and affordability, the consumer would greatly suffer. However, in terms of health, which is a key reason as to why there has been taxation on sugary drinks the consumer would be advantaged in the essence that there would be lesser consumption of sugary products which have positive consequences on health.


Should there be a subsidy imposed on the consumption of salads? How would a subsidy affect the market for salads?

There is a need of having subsidies on healthy products in a country. This is since they assist people in having better living conditions where they get to care about their health. Subsidizing goods is hence a very strategic measure and is also very critical, in that it will help the citizens in avoiding unhealthy foods that may be harmful to the wellbeing of the people. The government may hence impose a tax on the  sugary foods, but alternatively ensure that the salad foods are subsidized in terms of pricing  which will consequently  have  positive  effects to the people (U.S. Department of the Treasury, May 28, 2013).  The subsidizing may be undertaken through reducing taxes on the firms   which produce these products and offering them better deals that will help them reduce the market price of the products. When a customer walks into a shopping mall, or a given supermarket and finds out that the products are well priced, then he/she will be attracted to it and ultimately make a purchase. The more people will make purchases oh healthy products such as Salads and avoid sugarily and junk food, then their health and wellbeing will be promoted.

Subsidies are also the best ways of promoting sales of specific products since they give producers chances of undertaking more meeting strategies, hence increase awareness and ultimately boost the sales of a product. Any strategy that involves reducing costs tends to favor the client , making  him/her  attracted to making a purchase, It is, therefore, clear, that for the government to implement a specific measure that touches on the lives of the citizens, subsidies  and relating measure are some of the best strategies to use  since they impact on the prices, which are  the best ways of attracting a huge customer base.

Imagine that sugary drinks are sold in a perfectly competitive market. The government then introduces the tax. What happens to the market and individual firms in the short-run and the long run?

THE taxes on these products would adversely affect the companies producing these types of products.  First, there would be reduced consumption, where most consumers would ultimately opt for cheaper nonsugary products in the market. The reduced demand would result from reducing supply by the vendors of these products, meaning reduced sales and ultimately reduced revenues and the profit margins for these particular products (U.S. Department of the Treasury, May 28, 2013). This would be both for short- and long-term effect. However, as for the short-term effect, the firm would have to clear on existing stock which would not have been taxed, meaning that the effect would hence be felt more in the course of more production. The long-term effect would, however, be more thorough. This is since, many consumers would be conversant with the introduction of the new taxes, and hence reduce their consumption, which would lead to a lesser supply and adverse effects on the profit garnered by the company. However, the person to suffer most is the producer due to the fact that the company is profit oriented, meaning that the taxation may affect the profit margin affected by the company. With regards to choices on the market space and affordability, the consumer would greatly suffer. However in terms of health, which is a key reason as to why there has been taxation on sugary drinks the consumer would be advantaged in the essence that there would be lesser consumption of sugary products which have positive consequences on health .

The competing companies in this market would have to come up with more innovative products that would be able to attract their customer base and make them remain relevant despite the increased process. Some of the measures that these companies would undertake to include introducing nonsugary products to the market, focusing on more marketing despite the prices and explaining more on the needs for the clients to use the products despite the high prices.  This would also mean having to reduce the sugary context in the commodities since the sugar content is the key reason behind the high taxation by the government.

The most likely action to be undertaken by companies in this industry will be to reduce the number of sugar levels on their products, in order to avoid taxation.  However, this may fail to augur well with some of the customers who purchase some of these products due to the high sugar level in the commodities.  This is evident, in that in the past companies wishing to bring sugar levels on products faced stiff opposition from their customers, where there were petitions in place from the clients opposed to this idea. However, some firms have factored that having a major recipe change is relatively better than absorbing these high taxes.

Figure 6 Sugar Tax Debate (Christopher, 2016)

Sugar Tax Debate

In the case of Coca Cola, the firm has never had plans to change the recipe of the drink, even after threats of having more taxes-imposed ion these drinks.  Instead, the firm had new measures in place, where it opted to reduce the bottles and hence have a minimum price increase which would augur well with its customer base.  Brands such as Nestle, on the other hand, have settled on changing the recipes of their products by embarking on replacing sugar with artificial sweeteners, as a way of avoiding heavy sugar taxes.  However, this is an issue which has raised a lot of concerns from some of the quarters more so regarding the implications of the health as a result of these kinds of replacements. The sugar taxation does not only offer the company producing the products but also other related firms such as the marketing firms. In some instances, there have been strict regulations in nations such as the UK with regards to advertising products that have high sugar contents. This is in line with the taxation of the products where the government intends to minimize the intake of the products in order to ensure that citizens avoid getting health-related complications more so due to their high level of sugar intake.-28.

U.S. Department of the Treasury, A. a. (May 28, 2013). TTB Ruling Number: 2013-2.


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