Simulation of the increase in the price of sodas due to the tax

Although taxes only imposed $1 per liter sold, the magnitude of changes in the studied area was greater in retail; for example, the presentation of 600 ml of cola went from $9 to $10.50 from 2013 to 2014, while the presentation of a liter went from $12 to $14 in the same period. Therefore, the percentage change on average was 16.67%. In the study community, approximately $259 256.67 was spent on the purchase of sugary drinks. In this way, the 271 existing homes were extrapolated and it was estimated that each household consumed 79 liters at the initial equilibrium with 2013 prices.

In order to determine how the community income, the production of agricultural goods, livestock goods and the factor market, changes as a result of the soda tax, the experiment was carried out under two scenarios: a) in the first one, perfect competition was assumed; and b) in the second scenario, the absence of both the agricultural goods market and the livestock market was considered.

Since marketed goods as sodas are not part of the production function of households, no significant effects were found in the production of agricultural or livestock goods. Consequently, the marketed surplus and the demand for factors showed no relevant effects.

The main effect observed was the decrease on the demand for soda consumption at 14.29%. This result was due to the 16.67% increase in own price. The results described were presented for the two scenarios raised because, although the agricultural and livestock markets do not exist in the locality, the commercial premises that commercialize sodas at local and regional level persist.

In this sense, and according to the findings in the experiment, the main purpose of the sodas tax was met, i.e. the decrease in consumption. It should be noted that this decrease in consumption may be due to the price and income effect.

Price elasticity of demand for sodas

Estimating the elasticity of a product is important for a producer because it allows to determine the magnitude of the amount of consumer demand that will change when the sale price is increased by a percentage unit. It is also very useful for policy makers. It helps to know the size of change in consumption due to an increase in taxes, as in this case sodas. Thus, with the data of the household expenses of the studied area and based on the percentage changes observed in the results of the general equilibrium model, the price elasticity of demand for sodas was -0.85. This means that it is an inelastic good so that in increments 1% of the price, the amount consumed will decrease 0.85%.

At the national level studies exist to compare the magnitude of the elasticity found. ^{Fuentes and Zamudio (2014)} calculated the elasticity of the sodas considering a model without differentiating the presentations, whereas in other three models they distinguished different sizes. They estimated a price elasticity of -1.22 considering soda as a homogeneous product. In the other three models, the elasticities were in the range of -0.13 to -0.37. In this sense, the main conclusion of the authors is that when differentiating the product it has a strange behavior since it can go from elastic to inelastic. However, since the results of this paper do not differentiate the presentations, the reference value to compare is -1.22. Also, Colchero et al. (2013) quoted by ^{Fuentes and Zamudio (2014)} estimated by two models an elasticity of -1.01 in the first and for the second of -1.29.

An extreme case in terms of elasticity magnitude is that reported by ^{Valero (2006)}, whose estimate included sodas, soft drinks and natural juices. Concluding that price elasticity was -1.63 in 1992 and -1.39 in 2002; however, when considering the impact on rural populations (less than 2 500 inhabitants), the author states changes from -2.72 to -5.17, respectively, in the same period. According to this same author, for distribution reasons, the goods studied should not have taxes greater than 15% on the base price. Also, ^{Aguilar et al. (2011)}, (0), inelastic (-0.5), unitary (-1) and elastic (-1.5) were estimated in four possible scenarios of elasticity of demand for sodas. They concluded that this product behaves with inelastic demand tending to unitary and recommend a tax of between $2.00 and $3.00 per liter to cover practically all the expenses generated in the treatment of diabetes mellitus in Mexico. The conclusion of these authors agrees with the elasticity estimated in the present paper because it is inelastic and tends to unitary.

At the international level, some studies that report soda elasticities are: ^{Powell et al. (2012)}, through the review of the studies published between January 2007 and March 2012, found that the price elasticity of sweetened beverages is -1.21. Similarly, by an experiment in a hospital in the United States of America, ^{Block et al. (2010)} found that the drop in regular soft drink sales corresponded to a demand elasticity of -0.7, which was slightly inelastic.

Finally, this paper showed the changes in the total expenditure of a rural economy in response to the entry into force of the soft drink tax. The estimated effects could serve as a reference for decision-makers. Based on the estimated elasticity they will be able to have an idea of the consequences of increases or decreases in the tax. The reported elasticity presents strengths because it was estimated in a general equilibrium context. However, in order to have complete and convincing results, they must be validated in other rural communities in the country.

Conclusions

In the study population, the sugared drinks tax did not show a significant effect on the production of agricultural and livestock goods, nor in the factor market. However, in a peasant economy the family unit has the dual function of producer and consumer. In this way, in its role of consumer, the tax directly impacts on the proportion of household expenditure, decreasing the purchase of goods with the highest prices. This paper evidences the expectations of the decision makers regarding the decrease in the consumption of soft drinks due to taxes, however, the strategy to reduce consumption effectively should not be limited to just the price increase. For an effective reduction, it must be accompanied by complementary strategies.