Assignment
Berkeley has America's first soda tax, but stores are barely raising drink prices Vox August 20, 2015
Soda taxes are a perennial policy suggestion in response to America's rising obesity rate.
If soda costs more, the thinking goes, shoppers will buy less of it and consume fewer calories.
With this theory in mind, Berkeley, California, passed the country's first soda tax last November. New research, however, shows that the 1-cent-per-ounce tax isn't necessarily working as planned: Soda distributors are not passing most of the costs onto consumers. Economists John Cawley and David Frisvold show in a new National Bureau of Economics Research working paper that soda distributors have only passed on about 21.7 percent of Berkeley's new tax to consumers. They have, in other words, only raised soda prices by about a fifth of the new tax's price.
"These results imply that the Berkeley soda tax, because it is passed through to consumers to a lesser extent than anticipated, will result in less of a reduction in consumption, and thus less health improvement, than anticipated," the researchers write. Cawley and Frisvold also point out that their research on Berkeley's tax is at odds with other studies that looked at national soda taxes. Why would Berkeley be different? The researchers have a few theories, one being that retailers don't want to push shoppers to nearby stores outside of Berkeley, where they can still buy cheaper, tax-free soda.
Previous research has found cross-border shopping in response to food taxes, even at the state level. In the U.S., the mean distance traveled to shop for groceries is 5.2 miles; even for households with income below $30,000 the average distance traveled to grocery shop is 4.8 miles. In light of this, retailers may not try to shift the tax to consumers, fearing loss of sales. If true, taxes passed at the city level may be less effective at changing prices and consumption than taxes at higher levels of government that are harder to avoid through cross-border shopping.
Questions
1) Explain the rationale behind the soda tax. Is it revenue motivated or market failure motivated?
2) If the tax incidence on the consumer is 20% what does this tell you about the relative elasticity of demand and supply? Does this match your expectation?
3) Graphically analyze the soda tax and identify the welfare outcomes. In particular, discuss the change in welfare for each group along with the deadweight loss.
4) Subsequent research shows that there was a 10% reduction in the consumption of soda in Berkeley after the tax. Under what conditions on price is demand unit elastic?
How realistic is this price? Does this imply that demand is more likely to be elastic or inelastic? What can we say about the elasticity of supply?
5) The nearby cities of Oakland and San Francisco introduced a similar soda tax two years after Berkeley. How is the introduction of these taxes likely to change the tax incidence in Berkeley?
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