Explain with a diagram how a sugar tax affects the market equilibrium for A. coca cola, and for B. bottled water

A tax upon sugar will increase the costs for Coca Cola suppliers, therefore shifting the supply curve up and to the left. This will lead to a rise in the price of sugar from P1 to P2. Due to the increased price, demand will contract, until it crosses the new supply curve. At this new equilibrium, quantity demanded has decreased, from Q1 to Q2. This will lead to a loss in consumer welfare, shown by the decrease in the consumer surplus. We have already established that a tax on sugar would lead to a rise in price of Coca Cola and a reduction in demand for Coca Cola. Since bottled water is a substitute for Coca Cola, this will lead to a increase in demand for bottled water. This is shown by a shift of the demand curve to the right and down. In response to this increased demand, the price bottled water will increase from P1 to P2, and consequently supply will be extended until the supply curve crosses the new demand curve. At this new equilibrium, demand is higher at Q2 and price is higher at P2. would draw a diagram to aid

Answered by Eloise H. Economics tutor

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