MPE781 T1 2019: Assignment DUE DATE: 11:59pm AEST 30 April 2019 Assignment Overview: This assignment is based on an extract from an academic article, reproduced on the next page. For some questions,...

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MPE781 T1 2019: Assignment
DUE DATE: 11:59pm AEST 30 April 2019
Assignment Overview: This assignment is based on an extract from an academic article, reproduced on the next page. For some questions, you may also draw on resources available in the li
ary as well as other external resources. Please note that you need to provide clear references for any cited sources. Please adopt the standard Harvard referencing style:
Assessment: This assignment contributes towards 40% of your final score for this unit. This is not a group assignment.
Submission: This assignment must be submitted electronically on CloudDeakin (CD) Dropbox area by all students by 11:59pm on the due date. No hard copy is required. Include your name and student ID clearly on the first page of your answers. Please check the Academic Honesty and Misconduct section in the Unit Guide. Submitting your answers automatically implies that you have read and accepted the Plagiarism and Collusion Declaration, and that the submitted answers are entirely your own work.
Questions: Answer all questions. Limit the total word count of your assignment to less than 3,000 words (not including the reference list at the end). You are encouraged to provide necessary graphs and figures wherever you feel that they would clarify your answer. These are not subject to the word limit. Please provide coherent justifications for your answers and relate them to economic concepts wherever possible.
Taken from: http:
Taxing sugary drinks would boost productivity, not just health
June 21, 2017
Many studies have looked at the potential benefits of a sugar tax in terms of the longer, healthier lives and reduced health expenditure associated with tackling obesity.
But our new study goes one step further. It predicts that higher taxes on sugar-sweetened drinks will benefit the wider economy through increased economic productivity, by having more, healthier people in paid and unpaid work.
Obesity delivers a double whammy
A total of 63% Australian adults and one in four children are overweight or obese, making this both a health and an economic problem.
Obesity increases the risk of diseases including cancer, diabetes, heart disease and stroke. Obesity has also been estimated to cost Australia about A$8.6 billion a year or more. Not only does obesity drive up health-care costs, by causing illness and premature death, it also reduces people’s ability to work and contribute to the economy.
Added sugar contributes energy to the diet, but no useful nutrients. Increasingly, health experts suggest we should be treating sugar, and in particular sugar in soft drinks, as we do tobacco or alcohol, by taxing it to reduce consumption and so reduce obesity rates.
Taxing sugar is not a new concept. In the 1700s, Scottish economist Adam Smith wrote in An Inquiry into the Nature and Causes of the Wealth of Nations:
Sugar, rum, and tobacco, are commodities which are nowhere necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation.
Smith’s proposal to tax sugar was not aimed at improving health, as it is today. Now organisations like the World Health Organisation, the Australian Medical Association and many non-governmental organisations are advocating a tax on drinks with added sugar, as part of wider efforts to tackle obesity.
What we did and what we found

Our results show that a 20% sugar tax would mean about 400,000 fewer people would be obese. Three-quarters of these would be in the workforce, so that about 300,000 fewer employed people would be obese.
Over the lifetime of the adult population of Australia in 2010, this would add about A$750 million to the formal, paid economy, due to more, healthier people producing more goods and services.
The gains in unpaid work were even larger at A$1.17 billion. Fewer obese people means more healthy people, who have a greater likelihood to do unpaid work, in the household or as volunteers.
These indirect economic benefits from increased employment in the workforce and from greater participation in unpaid work were larger than the savings in health care costs, which we estimated at about A$425 million over the lifetime of the adult population.
In all, the tax could deliver over A$2 billion in economic benefits in indirect economic benefits plus health care savings. And that does not even include the value of the gains in people’s quality of life and how long they lived.
The exact size of the benefits depend on assumptions about what people would drink (and eat) if they drink fewer sugared drinks. In this study, we used Australian evidence that found an increase only for diet drinks, which contain virtually no energy.
Other evidence finds a sugar tax reduces the consumption of sugar and energy-rich foods, but may also lead to people eating fewer fruit and vegetables and more salt. This would reduce the health benefit, and that study suggests it would be even better to tax all sugar instead of only sugared drinks.
Questions 1 to 2 are based on the following:
Adam Smith proposed taxing ‘sugar, rum and tobacco’ because they are:
I. ‘nowhere necessaries of life’
II. ‘objects of almost universal consumption’
1) In consumer theory in Economics, what is the difference between a necessity and a luxury good? [4 marks] What is the likely difference in the tax revenue obtained from a tax imposed on a necessity versus a luxury good? Illustrate with the use of appropriate figures. [7 marks]
2) Why do you think Adam Smith prefe
ed to impose a tax on luxury goods? Why do you think Adam Smith prefe
ed a tax on ‘objects of almost universal consumption’? [4 marks]
Please turn ove
3) Why would a tax on sugary drinks ‘lead to people eating fewer fruit and vegetables and more salt’? Illustrate with the use of appropriate figures. [4 marks]
4) The article does not mention the costs involved with the imposition of a sugary tax. Illustrate with the use of an appropriate figure what the deadweight loss from the imposition of a tax would look like. In the case of sugary drinks, who would likely suffer a greater deadweight loss – the consumer or producer? [8 marks]
5) Should there be a subsidy imposed on the consumption of salads? How would a subsidy affect the market for salads? Illustrate with the use of an appropriate figure. [4 marks]
6) Imagine that sugary drinks are sold in a perfectly competitive market. The government then introduces tax. What happens to the market and individual firms in the short-run and the long run? Illustrate with the use of appropriate figures. [9 marks]
Answered Same DayApr 21, 2021MPE781Deakin University


Soma answered on Apr 26 2021
49 Votes
Question 1
Necessity and luxury good:
Income of the consumer is the key determinant of demand. The demand for the product positively depends on the income of the consumer implying an increase in income will lead to increase the demand for the produce or service. But the magnitude of the change of the demand with response to income changes can be estimated with the help of income elasticity of demand. When the income changes, the response to demand vastly varies and it depends on the types of the product. For the Necessity good, increase in income leads to lower percentage rise in demand. Here we have a positive income elasticity but it is less than 1(YED<1). For example, if the income of the people increases by 7%, the consumer will definitely increase the demand but by less than 7%., say 3% A good is said to necessity if there are few or no substitutes available in the market. Now for Luxury good, increase in income leads to bigger percentage rise in demand. Income elasticity for luxury good is greater than 1. (YED>1). For example, if the income of the people increases by 7%, the consumer will definitely increase the demand by more than 7%, say 10%. Sailboat is a luxury but doctor visit is a necessity. Whether a good is necessity of luxury that actually depends on the buyer’s preference not on the intrinsic properties of the good. In some cases, the same good can be a necessity to the poor but can be a luxury to the rich. An avid sailor perceives sailboat as a necessity and doctor visit as a luxury as he has little concern on his health. Whether good will be a necessity or luxury, that depends on the perception of the consumer. (Mankiw, 2012)
Differences in tax revenue:
Tax revenue from necessities and luxuries will be different due to differences in elasticities.
     When the good is a necessity, consumers do not respond much with the price changes. When the price of necessity increases, people will not reduce the consumption as a result, government can generate larger revenue. So, tax revenue will be greater for an inelastic good. Similarly, when the price of luxury hoods increases people become very sensitive to price changes. Tax revue is less for an elastic good. Tax frvenue is shown as the shaded rectangle in the diagram below. (Mankiw, 2012)
    Product category
    Tax revenue
    Higher when price rise
    Lower when price rise
We can show the impact of tax on with the help of demand supply diagrams:
Necessity goods
Luxury good
There is a striking difference on the impact and incidence of tax on necessities compare to the luxuries. Due to the inelastic nature, the demand curve is steeper for luxuries as illustrated in the above figure. The demand curve for elastic goods are relatively flatter. When the tax is imposed, the supply curve shifts to the left resulting a price rise. Since the consumers are not much sensitive to price changes in case of necessities, the producers tend to pass on the larger share of tax to the consumers. On the other hand, for luxuries, consumers usually respond with price rise fuelled by tax. In this case, producers have to bear the bigger share of the tax burden. (Mankiw, 2012)
    Supply curve shifts when tax is imposed
    Tax burden
    Tax revenue to the government
    More on consumers
    More on producers
Question 2
Adam Smith developed four maxims of taxation for public funding. (Drenkard, 2015) The first maxim deals with the distribution of tax burden that can provide the economic rationale for both points. If tax is imposed on necessities than labour wages will have an unintended effect. Consumption tax will become a tax on wages which is not acceptable by him. Smith prefers taxes on luxuries as they are less concerning to him.A tax on luxuries will discourage the frivolous consumption of poor families while collecting the tax revenue from higher income individuals. Tobacco or sugar have become objects of universal consumption. If such goods are taxed there will be no reduction of labour supply. If the tax is imposed on such goods, parents will cut back the consumption thereby protect the lives of their children.
Question 3
Sugary drinks is a key contributor to obesity, diabetes and many other heart related diseases. Government can take several actions to reduce the consumption of sugary items and increase the availability and access to healthy food items. Imposition of tax on sugary drinks is such an intervention to reduce the sugar consumption and protect public health. Countries across the world are in desperate need comprehensive action plans. (WHO, 2016)
Imposition of tax on sugary drinks will shift increase the cost of production that in tune shift the supply curve upwards. This will lead to increase the price of sugary drinks. Sugary drinks are inelastic in nature, people will reduce consumption but at a lesser extent. When consumers pay more on sugary drinks, they have less money at hand to buy other items like fruits and vegetables. Here we are assuming that every consumer has fixed budget for consumption expenditure.
People will reduce the consumption of fruits and vegetables because they have less amount to spend on such goods. Moreover, due to budget crunch, consumers tend to consume cheaper products. Salt is cheaper and they will buy more of salt. So, the price rise of sugary drinks will have a deeper impact on the fruits and vegetable market and also on salt market.
    Fruits and vegetable market
    Demand will fall
    Demand curve will shift to the left
     Salt market
    Demand will increase
    Demand curve will shift to the right.
The impact of price rise of sugary drinks due to imposition of tax can be illustrated in...

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