A sugar tax on soda

The chain in words

1. Step 1

   Before the tax

   Soda sells at 1.50 dollars a can and 80 million cans are sold a week. The horizontal axis is millions of cans per week. The vertical axis is the price per can. The market is at E₀.

2. Step 2

   Supply shifts left by the tax

   The tax adds 50 cents to what sellers must hand over on every can. For any quantity, sellers now need a price 50 cents higher to cover it, so supply shifts left, by the size of the tax. At the old price, sellers cut back and buyers want more than is offered: a shortage.

3. Step 3

   Price rises, but by less than the tax

   The price buyers pay rises, but by less than the full 50 cents, because higher prices make some buyers walk away. Sellers keep less per can after tax. The market settles at E₁: buyers pay more, sellers net less, and fewer cans are sold.

4. Step 4

   Who pays the tax

   The tax is split. Buyers bear the part the price rose, sellers bear the rest. The split depends on who can walk away more easily, which is what elasticity measures.

Takeaway. A per-unit tax on sellers shifts supply left by the tax, raises the buyer's price by less than the tax, and cuts the quantity sold.

Draw it yourself

More on the supply and demand graph