Question

Recently several states (including Illinois) have passed a “junk food tax” on addictive sugary foods and drinks. Lawmakers have stated the tax will help combat the growing childhood obesity issue in the U.S. Comment on the validity of this claim, using at least one graph to back up your claim.

Answer 1

Let us assume that the tax is imposed on sellers. In that case, effective price received by sellers will fall, so they will lower supply. The supply curve will shift leftward, increasing price and decreasing quantity.

In following graph, D0 and S0 are initial demand and supply curves of the junk food, intersecting at point E with price P0 and quantity Q0. After a tax on sellers, S0 shifts left to S1, intersecting D0 at point F. Price paid by buyers increases to P1, price received by sellers decreases to P2 (where P1 - P2 = unit tax) and quantity decreases to Q1.

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