In response to the obesity problem among children and adolescents, some policymakers have proposed a tax on soft drinks, those 150-calorie drinks that are responsible for about 10 percent of the caloric intake of adolescents. In an article in the New England Journal of Medicine, a group of doctors advocates a tax of one cent per ounce, which would increase the price of a 20-ounce beverage by about 20 percent. There is no doubt that a 20 percent increase in price would decrease the consumption of soft drinks. Although estimates of the price elasticity of demand for soft drinks vary, a mid-range estimates of 0.50 means that a tax that increased the price of soft drinks by 20 percent would decrease soft-drink consumption by about 10 percent.
There is some uncertainty about the effects of soft-drink tax on total caloric intake and obesity rates. Applying the equimarginal rule, the tax will decrease the marginal bang per buck of soft drinks, causing consumers to substitute juice and other products for soft drinks. For example, if before the tax the common marginal bang per buck is 12 (equal to 6 utils / $0.50), a 20 percent tax will decrease the marginal bang per buck of soft drinks to 10 (equal to 6 utils / $0.60). The bang per buck from juice will then exceed the bang per buck of soft drinks, and the consumer will substitute juice for soft drinks until the marginal bangs per buck are equalized. Because consumers substitute other food products for soft drinks, the decrease in soft-drink calories will be at least partly offset by increases in calories from other food.