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Chapter 6: Problem 6

When San Francisco and other cities in California adopted soda taxes, an opinion column in the New York Times observed, "Often, the taxes don't even pinch the budgets of low-income families, because they respond by drinking less soda." What does the columnist mean when he writes that soda taxes don't "pinch the budgets" of low-income families? Shouldn't an increase in the price of soda resulting from a tax always increase the amount that families have to spend to buy soda? Briefly explain.

Short Answer

Expert verified
The columnist implies that soda taxes don't necessarily 'pinch the budgets' of low-income families because, in response to the tax-induced price increase, these families may choose to consume less soda. This adaptive behavioral change neutralizes the effect of the price increase to an extent, hence their expenditure on soda may not increase or might even decrease. The assumption that a price increase automatically leads to higher expenditure holds only if consumption patterns remain unchanged.

Step by step solution

01

Understanding 'Pinch the budgets'

The phrase 'pinch the budgets' refers to a situation where an additional financial burden is placed on a person or family. In this case, it would refer to the additional cost of purchasing soda resulting from the imposition of taxes.
02

Analyzing the Impact of Soda Taxes

The soda taxes lead to an increase in the price of soda. Typically, one might think that this would increase the amount families have to spend on soda, thus 'pinching' their budget. However, this assumption only holds if the quantity of soda consumed remains constant despite the price change.
03

Understanding Consumer Behavior

In reality, consumer behavior is more dynamic. When the price of a good increases, some consumers choose to buy less of that good. This behavior is especially prevalent for goods that are not essential, such as soda. When the price of soda increases due to the tax, low-income families, who are especially budget-conscious, might choose to decrease their soda consumption, thus minimizing the additional burden on their budget.

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Most popular questions from this chapter

An article in the New York Times about the New York Metropolitan Opera (the Met) suggested that the popularity of opera might be increased if the Met reduced its ticket prices. But the article observed that such ticket price cuts would be possible only if the Met received a gift from "a very deep- pocketed donor." What were the authors of the article assuming would happen to the Met's revenue following the cut in ticket prices? What were they assuming about the price elasticity of demand for tickets to the Met? Briefly explain.

Is the demand for most agricultural products elastic or inelastic? Briefly explain.

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In recent years, increases in the number of visitors to national parks such as Yellowstone and Grand Canyon have resulted in over \(\$ 12\) billion in deferred maintenance costs. In response to the overcrowding that has contributed to the cost overruns, the Park Service has considered limiting the number of daily visits to the parks and soliciting corporate sponsorships. Margaret Walls, a research director and senior fellow at Resources for the Future, has offered another suggestion: Increase entrance fees. But she warned: "Figuring out an efficient and fair fee structure will not be easy. It requires detailed data on visitation, for starters, as well as analysis to shed light on price elasticities of demand for different groups of visitors at different locations." Why is it important for the Park Service to have estimates of price elasticities of demand before raising entrance fees to the national parks?

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