MPE781: Difference Between a Necessity and a Luxury Good – Economics Assessment Answer

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Subject Code: MPE781
Economics Assessment Answer
TASK:
Many studies have looked at the potential benefits of a sugar tax in terms of the longer, healthier lives and reduced health expenditure associated with tackling obesity.
Obesity delivers a double whammy
A total of 63% Australian adults and one in four children are overweight or obese, making this both a health and an economic problem.
Obesity increases the risk of diseases including cancer, diabetes, heart disease and stroke. Obesity has also been estimated to cost Australia about A$8.6 billion a year or more. Not only does obesity drive up health-care costs, by causing illness and premature death, it also reduces people’s ability to work and contribute to the economy.
Added sugar contributes energy to the diet, but no useful nutrients. Increasingly, health experts suggest we should be treating sugar, and in particular sugar in soft drinks, as we do tobacco or alcohol, by taxing it to reduce consumption and so reduce obesity rates.
Taxing sugar is not a new concept. In the 1700s, Scottish economist Adam Smith wrote in An Inquiry into the Nature and Causes of the Wealth of Nations:
Sugar, rum, and tobacco are commodities which are nowhere necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation.
Smith’s proposal to tax sugar was not aimed at improving health, as it is today. Now organisations like the World Health Organisation, the Australian Medical Association and many non-governmental organisations are advocating a tax on drinks with added sugar, as part of wider efforts to tackle obesity.
Questions 1 to 2 are based on the following:
Adam Smith proposed taxing ‘sugar, rum and tobacco’ because they are:

‘
nowhere necessaries of life’

‘
objects of almost universal consumption’

In consumer theory in Economics, what is the difference between a necessity and a luxury good? What is the likely difference in the tax revenue obtained from a tax imposed on a necessity versus a luxury good? Illustrate with the use of appropriate figures. 

Why do you think Adam Smith preferred to impose a tax on luxury goods? Why do you think Adam Smith preferred a tax on ‘objects of almost universal consumption’?

Why would a tax on sugary drinks ‘lead to people eating fewer fruit and vegetables and more salt’? Illustrate with the use of appropriate figures.

The article does not mention the costs involved with the imposition of a sugary tax. Illustrate with the use of an appropriate figure what the deadweight loss from the imposition of a tax would look like. In the case of sugary drinks, who would likely suffer a greater deadweight loss – the consumer or producer?

Should there be a subsidy imposed on the consumption of salads? How would a subsidy affect the market for salads? Illustrate with the use of an appropriate figure.

Imagine that sugary drinks are sold in a perfectly competitive market. The government then introduces tax. What happens to the market and individual firms in the short-run and the long run? Illustrate with the use of appropriate figures. 

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