Sunday, July 11, 2010

The Senate believes we need MORE beer and LESS soft drinks...Discuss...

     In Microeconomics we look at the effect of taxation on the demand and supply of goods and/or services.  In general, if you want MORE of something you reduce the taxes on that product/service because it decreases the cost of producing or it decreases the purchase price for the consumer. You would do this if you thought there was underproduction of this good and more of it would be desirable for society.  The good in this case creates a positive externality. If you want LESS of something you would increase the tax, thereby increasing the cost of producing or increasing the purchasing price for the consumer. You would do this if you thought there was overproduction of this good and less of it would be desirable for society. The good in this case creates a negative externality.  With this in mind, the following two articles present an interesting case study in taxation of a specific good. 
     The first one "Can Beer Stimulus Hop Up the Economy?" discusses a bill, submitted in the Senate, to decrease the tax per barrel of beer, from $7.00 per barrel to $3.50 per barrel. This decrease in tax applies specifically to small mico-brewers of beer.  The article describes (as the sponsoring Senators desire), textbook perfect, how this decrease in tax will reduce the cost of producing, increase the production of micro-beer, and stimulate the hiring of workers for the micro-brewing businesses.  By our definition above, it would appear that the Senate believes there is under-production of beer and more of it would be beneficial to society.  
     The second article "Senate Considers Federal Tax On Soda" discusses a bill, ALSO submitted in the Senate that proposes a 3 cent tax per 12 ounces on soft drinks (soda, Gatorade, energy drinks, etc). The implication is that these are not a desirable good and consumption of less of it is good for society.  This tax would serve to increase the cost/price of these categories of drinks, decreasing the demand hence the quantity supplied of the good. If producers/suppliers are supplying less, then they are going to need to hire fewer workers and most likely have to lay-off workers.  By our definition above, it would appear that the Senate believes there is over-production of soft drinks and less of it would be beneficial to society. (The graph looks like this)

    Three things come to mind here for me. First, in terms of positive and negative effects on society (mostly health related), is there a significant difference between beer and soft drinks when you add up all the costs and benefits and compare across the two goods? Second, the effect on employment in these two industries. Employment  in micro-brewing increases but employment in the soft drink market decreases. What is the overall net effect in terms of jobs? Third, the Senate is taking up BOTH of these propositions.  Are there contradictions?  Are there synergies? Are individual Senators trying to pick winners and losers in the economy using tax policy?  What do you think???
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