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Economic commentary microeconomics

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Introduction

Economics commentary number: HL Number 1 Title of Extract: Govt wants to bite back at junk food Source of extract: Nt news (Australian section) Date of Extract: 9/09/10 Word Count: Date commentary was written: 20/09/10 Section of syllabus to which the commentary relates: 2.1, 2.2\, 2.4 Candidate name: Marco Vitali Candidate Number: 0000 000 Govt wants to bite back at junk food BEN LANGFORD September 9th, 2010 JUNK food could be hit with a new 10 per cent tax to cut health-care costs and save lives, a major new report recommended yesterday. The report found 20 "intervention options" could save $6 billion in health-care costs caused by unhealthy living. And they could be a cost-effective way of saving lives. As well as the tax on foods high in sugar, salt and fat, other intervention options include a 30 per cent tax on cigarettes and alcohol. Based on a five-year study led by University of Queensland and Deakin University academics, the report involved input from 130 health professionals. ...read more.

Middle

The Australian government is attempting to correct the market failure through the use of taxes. The plan is to place a 10% tax on all junk food with the aim of increasing its price, and decreasing its consumption, leading to a decrease in its negative effect on community as a whole (social cost). These actions take into account the laws of demand and supplyiii. As represented in diagram 2, when a tax is imposed onto, for say, French fries, their price will rise from P1 to P2 and therefore their demand will fall from Q1 to Q2 causing people to consume less of them .In the case of implementing taxes the elasticity of demandiv of a good will also have to be taken into account. Since French fries have various substitutes (any other food that keeps you alive) and is nor vital nor addictive, is relatively elastic. This elasticity, as soon as the price is increased by 10% through the tax, would cause people to start buying less French fries substituting them with cheaper and healthy food (as all other unhealthy food would also be taxed according to the article) ...read more.

Conclusion

Although some people may ignore the higher price and continue to eat junk food, the majority of the population will hopefully see a decrease in consumption. This will consequently result in a correction of the market failure as marginal will decrease below marginal benefit although it is getting closer to Pareto optimality. If the government wants to fully eradicate consumption of junk food, it would have to enforce outrageous amounts of taxes to the point where demand will become zero and the firms producing them would have to close causing people to lose their jobs. Definitions: i) Negative externalities: When the production or consumption of a good has a negative effect on a third party. ii) Market Failure: A market has failed when there is inefficiency in allocation of goods, or in other words, not at Pareto optimality (Marginal cost= Marginal benefit.) iii) Law of Demand: Law of Supply: States that as the price of a product rises, the quantity supplied of that product will increase. iv) Elasticity of demand: A measure of responsiveness to a change in price. ...read more.

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