Question

3 Applications of Limited Attention 3.1 Sin and Sugar Taxes Many governments use taxes as a policy tool to discourage consumption of products that are considered unhealthy or socially harmful, like alcohol, cigarettes, and soda. The Coalition for Healthy Kids and Education has been campaigning for a 1.5 cent per ounce tax on soda sold in Multnomah County (Portland area). Imagine they succeed in getting this tax passed and you are advising them about how to implement the tax. If their goal is to maximize tax revenue, what would you tell them to do? If their goal is to minimize soda sales, what would you advise them to do?

Answer 1

Maximize tax revenue:

Tax revenue can be maximized if there is no fall in the sale of good. we do not need to spread information campaigns regarding the sin tax and evil outcomes of consumption of such goods, so due to problem of limited attention, consumers would not be moved to reduce the consumption of such good and revenue of government would be maximized.

Minimize sale:

Sale of soda can be minimized by spreading the campaigns about the tax and evil outcomes of soda. In this way, people will tend to reduce intake of soda. Their attentions would be focused on taxes and increase in price of soda. Now they might switch to other substitutes.

Limited attention argues that when consumers have to handle myriad of issue, they can not sense small rise in price of good owing to imposition of tax.