Tuesday, May 3, 2016

Mexican Soda Tax and Change in Qd vs Change in Demand. FUN STUFF!

A couple of years ago, the Mexican government imposed a "soda tax" on soft drinks.  Lots of controversy at the time but the goal was (1) to address the issue of obesity and (2) raise some revenue to combat obesity.
WSJ: "...Sales of soda are climbing two years after Mexico imposed a roughly 10% tax on sugary drinks—a bright spot for an industry that has feared it could be cast as the next tobacco.
Mexico’s tax was an attempt to cap alarming obesity and diabetes rates in a country where per-capita soda consumption is the highest in the world. It came at a time when then Mayor Michael Bloomberg was trying to limit sales of the beverages in New York City, and more countries are weighing a similar tax. 
Purchases, however, are rising in Mexico after an initial drop, making the country a key-growth market again for soda giants Coca-Cola Co. and PepsiCo Inc. Underscoring the resiliency of sugary drinks, the tax of one peso per liter has raised more than $2 billion since January 2014, about a third more than the government expected...."
 The first sentence (actually first clause!) in that last paragraph caught my attention. I put it in bold.  It is a nice opportunity to analyze these few, yet impactful, words with a market Demand Curve.

This first graph shows a downward sloping Market Demand Curve of soda in Mexico BEFORE the imposition of the tax at some price "Pe" and some market quantity demanded "Qde" at Point "A". Easy enough:
When the tax is imposed the price is going to be something higher than "Pe".  

Key point:  The only thing that has happened in this market is the price of soda has increased due to the tax.  We will move ALONG the market demand curve UP and to the LEFT. 

We are now at "Pe +Tax" and a lesser quantity demanded at "Qd1" at Point "B" 

Price goes up, Quantity Demanded goes down. Sound familiar?---Law of Demand!

But our key phrase from the article says that the quantity of soda consumed is now increasing after the initial decrease.  So what happened?
"...Anti-soda groups aren’t ready to declare the tax a failure and say sales got a boost from unusually warm weather..."--WSJ
So, something OTHER THAN THE PRICE of soda affected the Demand for Soda. 

Now, at Pe+Tax the Quantity Demanded is GREATER than it was before ("Qd1").  For simplicity I use the new quantity demanded back at "Qde"---we move from Point "B" to Point "C". 

Key Point:  As shown below, the market demand curve shifts to the RIGHT indicating an increase in Demand for Soda in Mexico, relative to the prior condition.

This article contains  MANY basic Microeconomic concepts but I really liked it because it nicely, if implicitly, illustrated the difference between a "Change in Quantity Demanded" and a "Change in Demand".

This is no small thing when trying to understand Microeconomics.

I hope it helps someone.

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