Thursday, May 28, 2009

A Bit More on the Possible Soda Tax

Yesterday's comment suggested that unless we tax all food or use only a single criterion for deciding what should be taxed, deciding what to tax and how much to tax it will be a tricky business. Of course, on the subject of vitamin fortified sodas, one reasonable question might be "if it is profitable why aren't people doing it already"?

The interesting thing is that while I am not aware of any vitamin fortified sodas, I am aware of vitamin fortified sweet beverages. I am even aware of brands of orange juice that are fortified with calcium and other vitamins. My nine year old can list off all the vitamins in the "for kids" version of one major orange juice brand.

Why do this? Product differentitation? The market for beverages has a lot of competition but does not fit the definition of being perfectly competitive. Product differentiation is important. However, we can presume that when it comes to soda, there is not a lot of vitamin fortified soda because the cost of doing this is not going to yield enough of an increase in the demand and ultimately the marginal revenue to increase profits.

So, why would it be more likely under a system with a tax on sodas? Well, taxing sodas would not change the demand but would change the marginal revenue to the soda producers at whatever price the consumers paid in the market. If the algorithm for determining taxes on sodas were based on a tradeoff between calories and nutrition, if the manufacturer could add vitamins at a low marginal cost and avoid the tax, it may be possible to capture more market share and increase taxes.

In fact, we might even see vitamin fortified alternative sweetener sodas emerge if people who had been drinking zero calorie sodas were tempted to switch to sugared sodas for the nutrition. Now, that would be an even more surprising effect of taxing sodas if it were to occur.

All because of product differentitation and an attempt to maintain market share and ultimately profits.

Thinking through things like this is a favorite pass-time of economists. There are almost always unintedned consequences of policy because we can only think of so many things like this and often the real market will come up with things we never expected.

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