Last week we talked about how policymakers and healthcare professionals can use elasticities to determine the effects on tax revenues and health outcomes in taxing products like tobacco and soft drinks/beverages. We also identified several items that makes the analysis complicated such as substitution effects and effects on low-income consumers. Below is a nice summary that I found online that discusses how an economist would employ elasticities to answer a question someone posed on the potential effectiveness of taxing beverages.

Daily Demand and Supply: Calculating an elasticity of demand for sugary drinks Question posed on From FiveThirtyEight.com: Philadelphia supermarkets and distributors say beverage sales have dropped 30 percent to 50 percent after the city instituted a 1.5-cent-per-ounce tax on sugary and diet drinks. On one hand, these are the same people who want to get the tax repealed, and we don't have hard numbers yet, so take this with a grain of salt. On the other hand, the whole point of the tax is to reduce consumption of stuff that will kill you anyway, so ... good job???

To measure the responsiveness of consumers to price changes, economist use what is called the 'price elasticity of demand.' In simple terms, the price elasticity of demand tells us whether consumers react a little or a lot when the price of a good changes. In technical terms, the price elasticity of demand is equal to the percentage change in the quantity demanded divided by the percentage change in the price. Because of the law of demand we know that the quantity demanded and the price will move in opposite directions, so the elasticity demand is a negative number. To confuse everyone, we report the price elasticity of demand as a positive number (the absolute value). If the price elasticity of demand is greater than 1, then we say that demand is elastic and that means that consumers are pretty sensitive to price changes. If the price elasticity of demand in greater than one, then we say that demand in unit elastic (the percentage change in the quantity demanded is exactly equal to the percentage change in the price). If the price elasticity of demand is less than one, then demand is price inelastic and that means that consumers are not very sensitive to price changes.

One reason we care about the price elasticity of demand is because there is a relationship between price elasticities and revenues collected. If demand is inelastic, an increase in the price will increase revenues. If demand is elastic, a similar percentage increase in the price will decrease revenues. The reverse is also true. This is why we see goods with elastic demand (furniture, groceries, clothing) going on sale more than goods with inelastic demand (gas, liquor).

So what does this mean for the sugary drink example above?

Lets look at the numbers and make some assumptions. The tax imposed on sugary drinks is $0.015 per ounce. For a 12 ounce soda thats an increase in the price of $0.18. To make the math easy lets say a 12 ounce soda costs $0.50 ($3.00 a six pack?) before the tax. An $0.18 increase in the price is a 36% increase in the price. That's pretty big.

How much does the quantity demanded react. If grocery stores are to be believed, the quantity demanded fell between 30% and 50% in reaction to the tax increase. That means the elasticity of demand is between 0.83 (30/36) and 1.39 (50/36): So it looks like demand is slightly inelastic to elastic. Now we can ask question like: If the goal is to raise tax revenues, will an Increase In the tax increase, or decrease tax revenues? Tax revenues will increase If demand is inelastic and decrease if demand is elastic. If the goal is to decrease sugar consumption, how effective will an increase in the sugar tax be? It looks like consumers might be price sensitive, so an Increase In the tax might be pretty effective at reducing sugary drink consumption

Source: www.env-econ.net/2017/02/daily-demand-and-supply-calculating-an-elasticity-of-demand-for-sugary. drinks.html

www.env-econ.net/2017/02/daily-demand-and-supply-calculating-an-elasticity-of-demand-for-sugary.

Look over the following abstract that reviews a study from Chile: Background: Chile is the second world's largest per capita consumer of caloric beverages. Caloric beverages are associated with overweight, obesity and other chronic diseases. The objective of this study is to estimate the price elasticity of demand for soft drinks, other sugar-sweetened beverages, and high-energy dense foods in urban areas In Chile In order to evaluate the potential response of households' consumption to changes in prices. ...

Results: We found an own price-elasticity of -1.37 for soft drinks. This Implies that a price Increase of 10% is assoclated with a reduction In consumption of 13.7%. We found that the rest of food and beverages included in the demand system behave as substitutes for soft drinks. For Instance, plain water showed a cross-price elasticity of 0.63: a 10% Increase in price of soft drinks could lead to an increase of 6.3% of plain water. Own and cross price elasticitles were simllar between models.

Conclusions: The demand of soft drinks is price sensitive among Chllean households. An Incentive system such as subsidies to non-sweetened beverages and tax to soft drinks could lead to Increases in the substitutions for other healthler beverages.

Source: Source:

https://www.researchgate.net/publication/313554276_Price_elasticity_of_the_demand_for_soft_drinks_other_sugar-sweetened_beverages_and_energy_dense_food_in_Chile

...and the following article summarizing two recent studles conducted in the United States.

Research reveals new evidence that sugary beverage tax Impacts are sustainable, effective (Dec 2021)

https://today.uic.edu/research-reveals-new-evidence-that-sugary-beverage-tax-impacts-are-sustainable-effective/

Two new studles published by researchers at the University of Illinols Chicago provide evidence that publlc policies to reduce consumption of added sugars through taxes on sugar-sweetened beverages are effective and sustainable. Sugar-sweetened beverages like soda, juice, and energy and sports drinks, are the largest contributor of added sugars in American diets. Overconsumption of added sugars significantly contributes to obesity and is associated with comorbidities like diabetes, which can Increase cancer risks and result in more severe COVID-19 illness. Currently, more than 50% of adults and 65% of children consume more added sugars than recommended.

Sugar-sweetened beverage taxes, often called soda taxes, aim to provide financial incentives to consumers choosing healthier beverages while also funding public health programs. The research team has been studying the Implementation of sugar-sweetened beverage taxes throughout the U.S. and the new studies analyzed data from Seattle, where the tax was implemented in 2018. The Seattle data was compared with data from Portland, Oregon, a city of similar size and demographics but without a sugar-sweetened beverage tax.

"While we and others have published a number of studies on the short-term effects of SSB taxes where they have been implemented in the U.S., these taxes are still relatively new, and we need sclentific data on longer-term impacts to understand if the policies have the potential to generate sustained public health benefits,' said study lead author Lisa Powell, distinguished professor and director of health policy and administration in the UIC School of Public Health.

The studles are the first to comprehensively evaluate the tax's long-term Impact across all store types and across all beverages and sweets sold. The researchers obtained Nielsen retall scanner data on unit sales and unit measurements, like fluld ounces or grams, of sugary beverages, sweets, and stand-alone sugar products In Seattle and Portland. Data Included all sales from the available sample of food stores Inclusive of supermarkets and mass merchandise stores, as well as grocery, drug, convenience and dollar stores - covering about 45% of all food store sales. In a Journal of Public Health Policy study titled "Impact of a sugar-sweetened beverage tax two-year post-tax Implementation in Seattle, Washington, United States,"Powell's team looked specifically at the economic Impacts of the tax after two years.

https://link.springer.com/article/10.1057/s41271-021-00308-8

Analysis showed: the prices of taxed beverages Increased by 1.04 cents per ounce, corresponding to a 59% tax pass-through rate; the volume sold of taxed beverages fell by 22%; and no cross-border shopping. A JAMA Network Open study titled "Evaluation of Changes In Grams of Sugar Sold After the Implementation of the Seattle Sweetened Beverage Tax" focused on the Impact of the tax on estimates of sugar sold after two years. The researchers found that one year and two years after Implementation, the tax created a 23 reduction In grams of sugar sold from taxed beverages. And while the analysls showed some offset from substitutions - a 4% increase in sugar sold from sweets In both years and an Initlal Increase In grams of sugar sold from untaxed beverages In the first year only - there was a net 19% reduction In grams of sugar sold from taxed beverages at two-years post-tax. "Our studles show that even after accounting for potential substitutlon behaviors, lIke cross-border shopping or selection of other items with added sugars, these taxes have a large, sustalned Impact on reducing volume and grams of sugar sold from sugary beverages," Powell sald, "This suggests that taxes may permanently reduce the demand for sugary beverages and help to lower rates of health harms that are associated with added sugars.

Source: https://today.uic.edu/research-reveals-new-evidence-that-sugary-beverage-tax-impacts-are-sustainable-effective/

Other studies have indicated the limited effectiveness of local soda taxes In significantly impacting tax revenues and generating positive health outcomes such as reducing obesity and diabetes. As we discussed in class, the results hinge on estimated elasticities of demand (are sodas/sweetened beverages price elastic or Inelastic and what about the substitution effects and unattended consequences?) Of course, the soft drink industry has cited these studies and also discussed some of the economic Impacts of losses in Industry jobs due to the implementation of soda taxes. However, they have responded to the fears of more widespread taxation and the changing demands/preferences of consumers by introducing products with less sugars, reducing product sizes and diversifying away from sugary soft drinks.

Finally, take a look at the following article, which is a great summary of many of the studies and complicated issues facing this debate. There will be a question on EXAM I that will draw on identifying some of the economic arguments posed for those in support and in opposition to a soda tax.

Should There Be a Soda: https://www.bakerinstitute.org/research/should-there-be-soda-tax

After reading this article, typewritten response to the following scenario:

Assume as an economist, you have been asked by a legislative committee in Frankfort to address whether you think a 5% state-wide tax on fast food (which will generate state tax revenues) OR a 5% price discount (which will generate state expenditures) on fruits and vegetables purchased at retail would be effective in producing positive health outcomes. Be sure to respond llke an economist, discussing what tools/methods you might use to conduct your analysis, impacts on the state budget, and some of the potential unattended consequences and complicating factors.

As an aside, the latest inflation data came out last Thursday prior to class. Data revealed that inflation is not subsiding. Most of the discussion by the analysts focused on food prices. But on a positive note for senior citizens, as we discussed in class, the CPI is used to adjust social security payments which due to inflation will up 8.7%. Here is a newspaper clip from the LA Times.

Americans Face a Pricier Thanksgiving