Table 1 shows the results of a town health survey after a tax was placed on sugary drinks. The tax revenue was used for government spending on school sports...
Question 1 Report
Table 1 shows the results of a town health survey after a tax was placed on sugary drinks. The tax revenue was used for government spending on school sports facilities.
| Year | Average price per 500 ml drink ($) | Drinks sold per week | Tax revenue per week ($) |
|---|---|---|---|
| Before tax | 1.50 | 24 000 | 0 |
| After tax | 1.80 | 19 000 | 5 700 |
(a) Calculate the tax per drink after the policy. [1]
(b) Explain why sugary drinks may create a negative externality of consumption. [2]
(c) Use Table 1 to explain one reason why the tax may improve economic welfare. [3]
Answer Details
(a) Tax per drink is calculated using tax revenue divided by the number of drinks sold:
\[\frac{\$5700}{19\,000}=\$0.30\text{ per drink}\]
$0.30 per drink [1].
(b) Sugary drinks can create a negative externality of consumption because consumers may not bear all the health-related costs of their consumption [1]. For example, taxpayers may fund treatment through the health system for diet-related illnesses [1]. This is a cost imposed on third parties.
(c) Sales fell from 24 000 to 19 000 drinks per week [1]. Therefore consumption of this demerit good decreased [1], which can reduce health-related external costs. In addition, the $5700 weekly tax revenue can fund school sports facilities, creating potential health benefits [1]. Both the lower consumption and the use of revenue can improve economic welfare.
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