Economics of a Latte Levy - KAA and Evaluation Paragraphs

Here is an example answer to a question assessing the strength of there case for a charge / tax on single-use disposable coffee cups. We build analysis and evaluation paragraphs.

KAA Point 1:

Indirect taxes are taxes onspending. Examples include VAT and excise duties. A new tax on single use disposable plastic cups would cause the supply curve for coffee retailers to shift to the left. My analysis diagram showsthat prices rise with a tax. Asa resultof the price rise,the quantity of coffee demandedshouldcontractand the consumption of single-use plastic cups is therefore reduced towards the socially optimum level. This can help overcome market failure due to negative externalities from consumption. More people would choose reusable cups.

Evaluation Point 1:

Whilst in theory anindirect tax might be effective, in practice, market demand for coffee is usually price inelastic (i.e. the coefficient of PED<1) in part because of strong habitual demand.Therefore any reduction in the quantity consumed will be relatively low making the latte charge less effective. The proposed levy of 25p per cup in the UK is small. For a £2.50cup of coffee it is only10% of the retail price, so the socially optimal level of consumption (where MSB = MSC) is unlikely to be reached simplyasaresultofthecharge.

KAA Point 2:

A second argument in favour of a charge on single-use disposable coffee cups is that the forecast revenue from the latte tax can be hypothecated (or “ring-fenced”) thereby increasing funding to help improve the UK’s recycling and reprocessing facilities. This will help to lift recycling rates from their current very low levels as well as creating extra jobs. Tax revenues might also help fund research into innovative start-ups who are developing biodegradable food packaging, including cups.

Evaluation Point 2:

On the other hand, manufacturers of disposable coffee cups argue that a tax places an unfair (inequitable) extra cost on coffee-drinking consumers, many of whom are on relatively low incomes and also that waste from paper cups accounts for less than 1 percent of total paper packaging waste. A tax on disposable cups might actually be damaging to smaller firms who are developing paper cups that are sourced sustainably and which do less harm to the environment. This would be an unintended consequence of the government intervention.