Substitute Goods: What happens with a sugar tax?
Summary
Context for Use
*Prior knowledge- scarcity, basic supply and demand graphs
*This activity is connected to the TBL activity titled "Complementary Goods" and the TBL activity titled "Demand v Quantity Demanded."
*This activity can take as little as 20-30 minutes or as long as 50 if graphing examples are included
Overview
This activity will help students understand the concept of substitute goods as a part of the unit on demand and supply, Students will explore the consequences- intended and otherwise- of instituting a sugar tax. What are substitute goods and how does the change in price or availability of one good affect the price or availability of the other? How might businesses use the knowledge of substitute goods in marketing their products?
Expected Student Learning Outcomes
Following this exercise, students should be able to understand what substitute goods are and explore the consequences- intended and otherwise- of instituting a tax on a good.
Information Given to Students
Application exercise:
New York wanted to institute a "big gulp tax"( New York Soda Regulations: a Big Gulp to Swallow - Avalara) as a way to deter customers from purchasing sugary soft drinks in to-go containers over 16 ounces. In addition, the revenue from the soda tax would be used to boost health benefits for low-income residents, similar to plans in Washington D.C. However, opponents argue that customers often simply move to the closest substitute product available, often equally undesirable thereby defeating the purpose of the tax.
What is the most likely outcome of a sugar tax?
A) Consumers will substitute equally harmful drinks
B) Consumers will substantially increase consumption of healthier drinks
C) Consumers will still consume sugary drinks
D) Consumers will drink even more sugary drinks because they have now been singled out as special
Teaching Notes and Tips
For the above exercise:
What is the most likely outcome of a sugar tax?
A) Consumers will substitute equally harmful drinks**This would indicate that sodas are substitutes for other similar beverages, if the price of a soda goes up, the demand for substitute (equally bad drinks) would increase
B) Consumers will substantially increase consumption of healthier drinks**This would indicate that substitutes for soda are healthier drinks, so, as the price of soda goes up, the demand for these healthier alternatives increases
C) Consumers will still consume sugary drinks**This would indicate an inelastic demand, meaning that consumers will continue to demand the same quantity no matter what the price is, how might this problem be solved?
D) Consumers will drink even more sugary drinks because they have now been singled out as special **This would indicate that sugary drinks have now been made "non-generic" and that the typical substitutes are not seen as equivalents anymore, in a higher level class, this could bring up the topic of perfectly competitive markets and how companies try to differentiate their products, in this case, the tax has differentiated the product for the companies
Use this exercise before the application exercise to explore the concepts of substitute goods. Have each group choose an option and then explain their reasoning.
Assessment
Assume that, for you, soft drinks and bottled water are interchangeable, that they are substitutes for one another, so, they are considered substitute goods. What would happen if the price of Coke increased?
I would buy more bottled water so the demand for bottled water would go up**Choosing this confirms that soft drinks and bottled water are substitutes, if demand goes up, the demand curve shifts right and, ceteris paribus, both the Qd and the P of bottled water would increase
I would buy more bottled water so the price of water would go up**This would eventually happen (see A) but first D would increase
The quantity demanded of soft drinks would go down**This is correct, as the price rises, we would move along the D curve to the left, this would result in lower Qd at the new higher price, but the Qs would increase leading to a surplus in product
The demand for soft drinks would go down**The Qd would be the result of an increase in price (see C)
I would start drinking something else!**Choosing this option means that bottled water is not a substitute for YOU! Each consumer has their own set of acceptable substitutes, which is why this can be a challenge for producers wanting to move the customer base to alternative products
How can goods seen as interchangeable be made to be seen as unique to customers? Have soft drinks or bottled water done this through their marketing campaigns? Do you have a preference on soft drink brands? On bottled water brands? What goods do you see as interchangeable that other people do not and vice versa? What if a seller wanted to introduce a completely different product as a "substitute" to soft drinks? Can a service be a substitute for a good?
*Demand is represented by the entire demand curve
*Quantity demanded is represented by a single point on the demand curve that correlates with one price and one quantity
*Change in the PRICE of a given product will change the QUANTITY DEMANDED of that product when all other factors are held constant (ceteris paribus)
*Change in factors OTHER than price of a given product will change the demand for that product
*Discuss what are substitutes for the students, for example, Chipotle & Chick Fil A, and how they would react if one of these places had a price increase- make sure to point out that not everyone reacts in the same way and not everyone has the same substitutes