IB Economics SL 2.1 Demand Question Bank

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Taxes on junk food and sugary drinks

(1) Some countries are considering indirect taxes on junk food or sugary drinks to reduce their consumption and increase government tax revenues. Over-consumption of goods with a high fat or sugar content has negative externalities, because it leads to obesity, serious health problems and additional health care costs. The principle behind such taxes is the same as taxes imposed on cigarettes and alcohol. These taxes are known as "fat taxes".

(2) In the United Kingdom (UK), discussions focus on a tax on processed foods, snacks and sugary drinks. Another possibility would be to impose a tax on full-fat milk, butter and cheese, in order to induce consumers to switch to less fattening substitute products with a lower fat content. Foods with a high fat content are linked to heart disease and premature death.

(3) In the United States, some states are considering imposing a tax on sugary drinks to raise funds for health care. Denmark already has a tax on these drinks and is planning a new tax on some high-fat dairy products.

(4) However, research indicates that such taxes would have a disproportionately large effect on low income households. One reason is that low income individuals tend to consume a larger amount of foods with a high fat content because these are cheaper. This is an important reason why low income individuals tend to be less healthy than wealthier people. It has also been argued that low income individuals respond to higher food prices by eating smaller quantities of healthy food.

(5) Food manufacturers have been angered by the idea of a "fat tax", arguing that the public would rebel against it.

(6) Studies have shown that the demand for most categories of foods and beverages is price inelastic. According to a representative of the Food and Drink Federation in the UK, "the fat tax may be a perfectly sensible issue to debate, but such a regressive taxation policy would reduce the purchasing power of consumers". He argues that it would be better if food manufacturers voluntarily improved their products. http://www.ncbi.nlm.nih.gov/pmc/articles/PMC280464; and
http://www.humanevents.com/2010/07/06/hard-truths-about-soda-taxes/
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Study the extract below and answer the questions that follow.
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