Economics

8. Concerned about obesity, the city of Berkeley, California became the first in the US to pass a tax on sugary beverages, including sodas such as Coke, Pepsi, and 7Up. Approved by a voter referendum last fall, the tax will be one cent per ounce. It will be imposed on sugary soda, energy drinks, juice with added sugar, and syrups that go into sugary drinks at cafes like Starbucks (like Frappuccinos). Exempt from the tax are alcohol (already taxed), diet sodas, drinks that are 100% juice, and drinks containing milk.

The tax will be collected from distributors of sugary beverages. Supporters argued, "This is not a sales tax on consumers. This is not a tax on retailers. This is a tax on distribution companies, the 15-20 companies that contract with beverage makers to distribute their products in Berkeley. The tax is added to the distributors' business license fee."

a) How would you evaluate the overall economic impact of Berkeley's soda tax? Will it be good for the economy? Explain as thoroughly as possible using concepts you have learned from the course, including a graph (without any precise numbers for prices and quantities).

b) A tax of one cent per ounce will amount to 72 cents for a six-pack of 12 ounce Coke. Suppose the price of a six-pack was initially $2. Also suppose the elasticity of demand for Coke is -0.5 and the elasticity of supply is 2.0. Predict exactly what will happen to the price of Coke paid by consumers.

c) Now suppose the average Berkeley resident consumes 50 six-packs per year. Predict exactly how many six packs per year the average Berkeley resident will now consume.

d) Using the answers from the previous parts, calculate the impact of the tax on the Coca-Cola market in Berkeley both (1) overall and (2) separately for producers, consumers, and city of Berkeley tax revenue.