Friday, October 18, 2013

Mexican Government implements a Junk Food Tax. Oh happy day! I get to do a lesson on Elasticity and Incidence of Taxation.

Here is a nice current article that helps teach the microeconomics concepts of Elasticity and Tax Incidence.
Mexico Tries Taxes to Combat Obesity(Wall Street Journal)
  • Congress's lower house of Congress passed late Thursday a special tax on junk food that is seen as potentially the broadest of its kind, part of an ambitious Mexican government effort to contain runaway rates of obesity and diabetes.
  • The House passed the proposed measure to charge a 5% tax on packaged food that contains 275 calories or more per 100 grams, on grounds that such high-calorie items typically contain large amounts of salt and sugar and few essential nutrients.

The success of this policy will hinge on how sensitive consumers are to increases in the price of their favorite junk food. If they are sensitive to price changes then the the quantity demanded will decrease significantly ("Demand is relatively ELASTIC").  If they are insensitive to the price change then quantity demanded will decrease, but by a smaller amount ("Demand is relatively INELASTIC").
The success of the policy and who will bear the burden of the tax is dependent on the Elasticity of Demand for junk food.
Here are my graphs showing both states of elasticity and how it affects consumer and producers.

Comments from the article suggest that demand is relatively INELASTIC:
Héctor Ortega, a 45-year-old operator of a street stand in downtown Mexico City, predicted that consumers may pull back briefly when prices rise, but then return to their old habits. 
"Just like the cigarettes, people will go back to their old habits," said Mr. Ortega. He said junk food was obviously unhealthy, but it was often the only thing that poorly paid office workers and students can afford. "This is a restaurant zone and the food here is expensive. For some people, these products are the only food available." 
Fernando González, 24, an office worker who frequents Mr. Ortega's stand, is a big fan of sodas and gum, in particular. When the new prices kick in, he said, he won't give up on his favorites, but will probably buy less chips and candy.
"It's a craving, it's an addiction, it's something people enjoy," he said of Mexicans and their treats.
While the Quantity Demanded will decrease the question is will it decrease enough to achieve the policy objective?

Consumers will pay a higher price for a smaller quantity. Producers will receive a lower price for a smaller quantity supplied.

The winner in all this?  The government will gain tax revenue for certain. Are the revenues going for specific public health program(s) to counter obesity?
The snack food levy is part of a bigger tax proposal from President Enrique Peña Nieto which aims to raise the government's non-oil tax collections.
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