Question

Recently there has been discussion in the news about taxing junk food (soft drinks, for example) in an effort to reduce the incidence of obesity in the U.S. Do you think the demand for junk food is elastic or inelastic with respect to price. Based on your knowledge of the price elasticity of demand, do you think the dead weight loss of a soda/junk-food tax would be relatively large or relatively small? Why? Do you think taxing junk food would be a good idea? Based on your analysis, would it really help reduce the number of obese people in the United States? Explain.

Answer 1

Elasticity of demand = %change in quantity demanded / %change in price

Consumers in U.S. have inelastic demand for junk foods which means that even if price of junk food rises, consumers will not reduce quantity demanded of junk food. Deadweight loss occurs when there is loss of quantity traded due to taxation in the market while here consumers will pay for the tax and does not reduce quantity traded. It meana that deadweight loss will be relatively small than if demand was not inelastic. It is still a good idea to tax consumers to reduce junk food even if they do not reduce quantity demanded by large but we have to raise awareness against obesity and run campaignes along with imposing tax.