Soda Tax Economics

I just paid $3 for a Diet Pepsi in the Providence convention center because I’m in the Providence convention center and that’s what they charge for Diet Pepsi here. I bought it even though I’m a Diet Coke drinker because they didn’t have any Diet Coke.

This it seems to me is a pretty typical situation with regard to soda in circumstances of limited competition. I’m hardly suffering under the boot of a “monopoly.” I could leave the convention center and find a cheaper soda somewhere. And maybe tomorrow I will. But for now I wanted a soda, there was one soda vendor, the vendor was charging a lot, and so I paid a lot.

It’s the kind of situation that can give us some insight into the potential for a soda tax as a public policy measure.

It tells us that any plausble soda tax should be seen primarily as a tax policy matter and only very secondarily as a public health measure. The habitual soda drinkers who make up the bulk of the soda-buying population will mostly just pay up. You’ll raise a lot of revenue in an economically efficient way, and only very mildly deter soda consumption. What’s more, the people most likely to be deterred are the people with a weak attachment to soda drinking. Those are people who either aren’t negatively impacted by the health consequences of soda drinking (because they don’t drink much soda) or who won’t be positively benefitted by reduced soda consumption because they’ll gladly substitute to something like (like coffee drinks with tons of sugar in them).

The more interesting question is the long-term one. I’ll gladly pay $3 for my Diet Pepsi because I’m already a diet soda junkie. But if all Diet Pepsies everywhere were this expensive, would I have taken it up in the first place? Very possibly not.