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Evaluating Tax Policy Effectiveness
A city government wants to achieve two separate goals: 1) significantly reduce the public's consumption of sugary soft drinks for health reasons, and 2) raise a substantial and stable amount of revenue to fund park maintenance. They are considering imposing a 20% tax on one of two products: sugary soft drinks or gasoline. Market analysis indicates that the quantity of sugary soft drinks purchased is highly responsive to price changes, while the quantity of gasoline purchased is not very responsive to price changes in the short term.
Analyze the situation and recommend which product should be taxed to achieve each of the city's two goals. Justify your recommendations based on the likely consumer response to the price increase for each product.
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Analysis in Bloom's Taxonomy
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