“Fat” Tax On Pop Soda Analysis
Economic Analysis of the impact of policy

Course: Microeconomic Theories (Eco204)

The Group of Eight (Canada, France, Germany, Italy, Japan, Russia, the UK and the US) generated almost $291 billion in soft drinks sales in 2010, according to Market Line. Pop soda has been such an important good in people’s everyday life and it generates huge revenue for the whole economy. It is reasonable to believe that the government’s new proposal of imposing a 1% “fat” tax on pop soda sold in the market will lead to some remarkable effects on both the supermarkets and consumers. In my opinion, the “fat” tax proposal is not a good choice for the government.
By doing calculations and analysis based on current market demand, we can get the current revenue-maximizing average price per ounce of soda sold per week in the supermarket chain, the optimal quantity and the maximum revenue. They are 0.017 dollars, 29469 ounces, and 502.05 dollars respectively. However, after the 1% “fat” tax, the situation changes. First of all, no matter who is paying the tax, whether the consumers or the suppliers, prices will be driven up. If consumers are the ones to pay for it, the tax amount will be added directly to the soda prices, and if it is the other way around the amount will be indirectly reflected on the soda prices. Secondly, since pop soda is reasonably considered to have many substitutes, for instance water, tea, coffee etc., its increasing price will lead to a decrease in demand, and further lead to deduction in quantity sold. Again by calculation, we can get the new optimal price (0.1717$ per ounce), quantity (29238.19 ounces), and maximum revenue after the tax (502.02$). By comparing the new figures and the original ones, we can confirm our analysis about price and quantity changes. When looking at the new figures above, it is easy for