How are the price, income and cross price elasticity's of demand, and the price elasticity of supply, relevant to assessing the effectiveness of taxes for cutting the consumption of unhealthy goods?


The researchers at Nottingham and Oxford university claims that adding a VAT of 17.5% on unhealthy food can save upto 3,200 lives per year by reducing the demand for junk foods resulting in lower rates of health complications like heart attacks, diabetes and obesity. The governments all over the world are taking steps to accomplish this goal by imposing the heavy taxes and increasing the prices on the commodities. In this essay we are going to discuss about how the application of these taxes will lower down the expenditure on these unhealthy goods.

The factors that affect the usage of a particular item or good are: the Price set by the manufacturer or retailer, the Income of the consumer, the policies set by the Government or the Food and drugs department and the taxes applicable on that product.

The Economic theories applicable in this context are:

Price elasticity of demand:

It refers to how price of any good changes with respect to demand. It also refers the amount of money the consumers are ready to pay for something. It can be calculated by dividing the percentage of change ib the demanded quantity by the percentage change in the price.

Whenever there is increase in the price, the demand falls. These are the negative elasticity's of price. The greater negative elasticity means small increase in the price is needed so that less population can consume it. Ultimately the demand of the item goes down.

Government is increasing the prices of unhealthy goods like cigarettes, alcohol, junk food etc so that the demand for these items goes down and also lowers the risk to their health.

Income elasticity of demand:

It measures how the change in the quantity demanded of a particular item relates with the change in the income of a consumer. For the majority of population income remains fixed though there is increase in the price of the items. This is the reason people hesitate to buy the things.

This results in decrease in the purchases of these items leading to reduced demand. In case of unhealthy goods the government is following the same policy to reduce the demand.

Cross price elasticity of demand:

It is the responsiveness to the demand of one product to the change in the price of its substitute or complementary product. Hence as per this theory as soon as there is increase in the price of any good, the demand for its substitute or complementary product will also change. It is positive for substitute items and negative for complementary items.

Applying this theory, when government increase the prices on unhealthy food items, the demand for the healthy food items will also increase as the consumers will not able to meet the expenses of the unhealthy food items.

Price elasticity of supply:

It relates between the change in the quantity supplied and the price changes. The firms respond faster to a change in demand when supply is elastic. And firms find it challenging to change the production in the limited period of time when supply is inelastic.

Effect of Taxes on unhealthy items:

As mentioned earlier, government is imposing taxes to cut down the consumption of unhealthy items. The manufacturing companies bear heavy taxes first and then the suppliers or dealers when the goods are in market like cigarettes' dealers have to bear extra heavy taxes when the product is in the market.

The heavy taxes make the manufacturers or dealers or suppliers to increase the price if the items to meet their margins making them unaffordable for the consumers resulting in less consumption of unhealthy items.

This also results in the profit to the government. The government will earn through the heavy taxes and can use the money in other public welfare. Also the less consumption of unhealthy items will result in healthy individuals ultimately saving the expenses of government on public healthcare.


The government across the world is making this sector of market as their premium income source. The money earned by the government by applying these heavy taxes should be used for the public welfare, healthcare and safety.

The application of taxes on unhealthy items thus can lead to increase in price decrease in supply as the demand will also decrease. And here applies the economic theory that price change is moderately elastic.


Case, K. & Fair, R. (2007). Principles of Economics. Upper Saddle River, NJ: Pearson Education. p. 54.

Price elasticity of supply. [Online]. Available: [accessed 6th Dec. 2009]

Riley B., September 2006. Income elasticity of demand. [Online]. Available: [accessed 6th Dec. 2009]

Silverman J., 2007. Would a fat tax save lives? [Online]. Available: [accessed 4th Dec. 2009]

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