The government wants to discourage the consumption of sugary drinks and proposes introducing a 20 percent tax on them. A survey shows that the demand for sugary drinks is perfectly elastic and people are equally happy to stop consuming those drinks and switch to healthier alternatives. Producers of sugary drinks complain and say they will increase their prices by 20 percent.

Explain and illustrate with agraph, why sugary drinks producers are wrong.

The graph shows the supply curve for sugary drinks.

The demand for sugary drinks is perfectly elastic.

Draw the demand curve for sugary drinks when the market price is$6 a case.

Now the government imposes a$1 tax on a case of sugary drinks.

Draw a point to show the price paid by buyers and the quantity purchased.

When the government imposes the 20 percent tax on sugarydrinks, sellers_____ raise the price by 20 percent and____.

A.

don't; buyers pay some of the tax and sellers pay the rest of the tax

B.

can; buyers pay all of the tax

C.

can't; sellers pay all of the tax

D.

can; the tax is split equally between buyers and sellers

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Quantity(millionsofcasesperyear)

Price(dollarspercase)

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interactive graph

>>> Draw only the objects specified in the question.