A city government hopes to decrease the quantity of sugary drinks consumed, and is planning to implement a tax on the drinks. Should the government tax companies that sell sugary drinks, or the consumers who purchase them?

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Business

Chiquita

11 August, 13:12

A city government hopes to decrease the quantity of sugary drinks consumed, and is planning to implement a tax on the drinks. Should the government tax companies that sell sugary drinks, or the consumers who purchase them?

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Senior · Answer 1

Government should tax consumers of sugary drinks, rather than sellers.

Explanation:

If government levies tax on sellers; Sellers might share the tax burden wholly, partially or none with the buyers.

Such tax burden share depends on inelasticities of demand & supply - if demand is more inelastic, more burden is on buyers & if supply is more inelastic, more burden is on sellers.

So in case : demand is relatively more elastic & supply more inelastic, more tax burden will be borne by sellers. Hence, despite of tax - there will be less or no change (rise) in buyer's price & therefore it won't be effectively reducing quantity of sugar drinks consumed

If the tax is on buyers, it will directly effect their demand & consumption of sugary drinks.