Econ 1101: Quantity Demanded - The Marginal Private Cost - Economics Assignment Help

Assignment Task:

Question 1

Earlier this year the Australian of the Year, Dr James Muecke, renewed calls for a tax on sugary drinks. As of 2019 28 countries had implemented a sugar tax. This includes the UK where a tax on sugary drinks came into effect in 2018. (Bridge, 2019). 

Reference Bridge, G. (2019), ‘Sugary drinks tax is working – now it’s time to target cakes, biscuits and snacks’, The Conversation, https://theconversation.com/sugary-drinks-tax-is-working-now-its-time-to-target-cakes-biscuits- and-snacks-124325 (last accessed 14/8/20). 

Let us assume you are an economic consultant and you have been engaged by the federal government to provide independent advice on the merits (or otherwise) of introducing a tax on sugary drinks in Australia. You are told that the market for sugary drinks in Australia has the following characteristics (note the quantity is ‘000 per week but for convenience just work with the figures as given) 

i. Quantity demanded (marginal private benefit curve) = 600-40P

ii. Quantity supplied (marginal private cost curve) = -50+25P

iii. Quantity supplied (marginal social cost curve) = -60 + 20P 

You are asked to: 

(a) Draw the marginal private benefit (MPB) curve, the marginal private cost (MPC) curve and the marginal social cost (MSC) curve in a diagram using the three equations provided above. [4 marks] 

(b) If social costs were not taken into consideration, what is the equilibrium price/cost and quantity of sugary drinks in this market and why? [1 mark] 

(c) What is the socially efficient optimum price/cost and quantity of sugary drinks and why? [1 mark] 

(d) Using the mid-point method, calculate the price elasticity of demand going from a price of $5 to a price of $7. [1 mark] 

(e) Interpret your finding at 1(d) above [3 marks] 

Question 2

Based on what you learned during at UWA during your economics studies you believe there may be merit in levying a Pigouvian tax on the producers of sugary drinks. 

(a) On your diagram show, graphically, how a Pigouvian tax could work if a tax of $2 were to be imposed on the producers. (Do so by copying and pasting your earlier diagram below and showing the new curve). [1 mark] 

(b) Using your diagram (at 2(b) above) and letters (A, B, C & D.) show the following areas after the tax: (i) the consumer surplus (A); (ii) the producer surplus (B); (iii) government revenue (C); and (iv) deadweight loss (D). [2 marks] 

(c) Given what you know, outline (explain) the pros and cons of imposing a Pigouvian tax in this market? [7 marks] [Max 800 words (not including references). Report your word count at end of Question 2(c).] 

Question 3

Through your own research: 

(a) Identify the external costs (i.e. negative externalities) of sugary drink consumption and identify alternative solutions (i.e. solutions other than a Pigouvian tax) to reducing these negative externalities. [5 marks] 

Note: Use diagrams where and as appropriate to really explain your answers. In undertaking your research may wish to consider questions such as: who drinks the most sugar in Australia (eg. men? women? young people? people in WA)? What drinks have the highest sugar content? 

(b) Having weighed up the pros and cons of a Pigouvian tax and the pros and cons of alternative solutions what is your final recommendation to the Australian government? In other words, given that there is a social cost associated with the consumption of sugar, in your view, how should it best be tackled? Why is this your favoured solution? Explain it from an economic perspective (remember you are writing this report as an economic consultant). [5 marks]

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