Junk food has often been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state of Oklakansas imposes a tax on junk food.
a. What needs to be true for the tax to actually deter people from eating junk food: Should junk food demand be elastic or should it be inelastic?
b. If the Oklakansas government wants to strongly discourage people from eating junk food, when will it need to set a higher tax rate: When junk food demand is elastic or when it is inelastic?
c. But hold on a moment: The supply side matters as well. If junk food supply is highly elastic—perhaps because it’s not that hard to start selling salads with low-fat dressing instead of mayonnaise- and cheese-laden burgers—does that mean that a junk food tax will have a bigger effect than if supply were inelastic? Or is it the other way around?
d. Let’s combine these stories now. If a government is hoping that a small tax can actually discourage a lot of junk food purchases, it should hope for:
I. Elastic supply and inelastic demand
II. Elastic supply and elastic demand
III. Inelastic supply and elastic demand
IV. Inelastic supply and inelastic demand