24 Feb 2016

The sugary sweet demand for soft drinks

Isabel writes*

What do cardiovascular disease, cancer and respiratory disease have in common? In addition to them accounting for most non-communicable disease related death globally, they share a common major risk factor: obesity. Obesity is caused by an energy imbalance in which more energy is consumed than burned. Globally people are physically inactive, and consume highly processed foods containing lots of fat and sugar. A major contributor to this are sugary, artificially sweetened drinks. In the US only, half of the population consumes these drinks daily, ranging from daily intake of 250-600 calories. For US teens soft drinks make up over 11% of their diets, making them the top calorie source for them. Consequently, I believe if we want to fight this obesity epidemic, a major cutback in soda drinking has to become a priority in government policy globally. Elasticity of demand for these drinks can be a useful tool to judge upon the possible approaches that can be taken towards reducing the consumption of sugary beverages. A recent study on the elasticity of major food groups has concluded the mean elasticity of demand for soft drinks to be 0.79. This makes soda an inelastic good, and its demand is thus not much affected by price changes. Hence, if a 1% tax would be implemented on soft drinks, a 0.79% decrease in the demand of the good could be expected. As the mean taxation rate is at 3.549% across the US, a 2.8 % reduction in the demand of soft drinks can on average be expected. Although I believe little decrease in demand is better than no reduction at all, tax rates are too low to have a significant effect on the demand of soft drinks.

Therefore, Mexico should be taken as an example. The Mexican government has implemented a 10% tax on soft drinks in 2014, and as a result sales declined almost 12%. This number was as high as 17% among low-income families. It appears that if the tax is of a sufficient magnitude, and assuming the elasticity of demand for sugary drinks is indeed somewhere near 0.79, taxation of these beverages can be an effective tool to lower the consumption of them. As to the US, a 10% tax rate on sodas can lead to a 7.9% decrease in the demand of the good. Consequently this could be the start of restoring energy imbalances, and obesity rates can be reduced among both teens and adults.

Bottom Line The elasticity of demand for soft drinks in the US tells us that the product is not very response to price changes. However, the average soda tax across the US is only 3.55%, which is too low to have a substantial impact. Therefore, taking Mexico as an example, increasing the tax rate to at least 10% would be an effective way of lowering the consumption of artificially sweetened beverages. This in turn could possibly serve as a mean to lower obesity rates among both teens and adults.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.