Effects of Tax on the Sales of Sugar-Sweetened Beverages

Effects of Tax on the Sales of Sugar-Sweetened Beverages

Effects of Tax on the Sales of Sugar-Sweetened Beverages: Supply and Demand Model

Supply and Demand Model is one of the most fundamental concepts of economics, which also sets the primary reference to market economic analysis. Demand can be described as the quantity of a product that consumers desire to buy while supply can be defined as the quantity of goods and services that a market can offer (Colchero 2015). These descriptions imply that not every quantity that a market can offer can be bought and similarly the market cannot offer the total quantity in demand at all times. Inferentially, this aspect forms a basis of how supply and demand model can be used to control supply and demand thus, control consumption of a product.
According to Nakhimovsky et al. (2016), imposing taxes on SSBs increases their prices in the market, especially in a market where there are few producers. Increased prices would reduce the demand among consumers as opposed to if the prices are relatively cheap. Concerning the supply, imposing taxes on these products would reduce their supply due to reduced demand; reduced demands reduce the need among produces to supply (Heise et al. 2016). The following diagram illustrates the supply and demand model of controlling the consumption of SSBs in the market.
The supply function before imposition of heavy taxes on sugar-sweetened beverages is represented by supply curve D0. After imposition of the said taxes, the prices of sugar-sweetened bear beverages will increase. This is due to the fact that the producers will have to increase their prices due to increased cost of production. Thus, resulting to a reduction in its supply in the market hence, the shift of the supply curve from S0 to S1 (Dilts 2004). This reduction will only be applicable in the initial months as patrons get used to the new price.

Question 1: Suppose a severe drought hits the sugarcane crop. Using a supply and demand model explain how this will affect the equilibrium price and quantity in the market for sugar and the market for honey