If You Tax Something, You Get Less of It
CHICAGO SUN-TIMES--Are Chicagoans trekking to the suburbs to buy cases of bottled water -- and avoid a new nickel-a-container tax that adds $1.20 to the price of a 24-pack? Or are they making the switch to tap water to save money? One or the other is happening. Maybe both.
Revenues from Chicago's new bottled water tax are trickling in -- at a rate nearly 40% below projections -- exacerbating a budget crunch that has already prompted Mayor Daley to order $20 million in spending cuts. January collections were $554,000. That's far short of the $875,000-a-month needed to meet the city's $10.5 million-a-year projection.
Comment: Some remedial economics for Chicago's City Council?
1. People respond to incentives.
2. Demand is elastic, and there are substitutes for everything.
3. If you tax something, you get less of it.
Or to paraphrase Thomas Sowell, this story suggests that "The first lesson of economics is that people respond to incentives. The first lesson of politics is to ignore the first lesson of economics."
(HT: Market Power)
20 Comments:
This reminds me of the cigarette tax Wisconsin recently passed. The justification was 1) smoking cessation and 2) Revenues tied to health care for "children".
Where does the money then come from once the tax intake decreases (from less smoking)?
But, maybe it doesn't matter if people stop smoking. Perhaps, the justification for rolling more health-care to the state tax rolls is now set.
The means justify the ends.
Didn't Sowell say that the first lesson of economics is that scarcity exists?
Maybe consumers are finally tired of paying buku dollars for small plastic containers of filtered local tap water.
Now that research debunks the health value of guzzling water can the decline of the bottled water industry be far behind.
Buku? What the hell is Buku?
Maybe you mean "Beaucoup"? It is French.
anon 10:43 look it up, you are closer than you think.
you're correct in that the govt seems to never consider the demand decrease when estimating the revenues from a tax increase. are they stupid or just liars? probably equal parts of both.
however, to the extent that people are not just going to the suburbs to buy bottled water, i think this worked out quite well. the lowered demand gets that much plastic waste out of the system. and the demand that's left gives chicago some extra revenue from people too stupid to just drink tap water.
Thomas Blair:
Yes, Sowell said that the First Lesson of economics is scarcity. That is why I wrote that I was "paraphrasing" Sowell.
Why is it "stupid" to drink bottled water? Is it irrational to qualitatively prefer one thing over another? The tap water where I live tastes terrible. Further, some bottled waters taste like crap, so I drink the varieties that I like. Your ignorant, normative posturing doesn't add anything intelligent to the conversation, except to remind us of the type of conceited, faux-intellectual people who contend that their opinion should count for more than anybody elses.
If you (and nanny-statist twerps like you) *ever* buy prepared foods or drinks, you are engaging in hypocritical behavior. The whole "bottled water is superfluous" kerfuffle is more feel-good, anti-market asshattery from morons who wish to grab more power over others. You don't want to drink bottled water? Fine. Don't buy it or drink it. Keep in mind that Coke and other soft drinks are ~98% water, coffee is probably a greater percentage of water than that. Your kvetching about water is all about transferring your preferences to others. Stop it.
skh.pcola
Ack. The above comment was directed to "bobble," not Prof. Perry.
skh.pcola
Penn & Teller did a show on bottled water on their show, Bullshit. It was humorous, and for some it would be informative.
On a related note, I've always been bemused by individuals who will drive dozens of miles out of their way to buy things that are trivially less expensive, like three cents off of a gallon of gas. I know there are a lot of less than astute humans in the world, but one would think that the simple math of the equation would give them a clue as to why they're not really saving any money.
skh.pcola said..."Your kvetching about water is all about transferring your preferences to others. Stop it."
Wow.
So you would prefer to transfer your preferences to bobbie instead.
skh.pcola: "Why is it "stupid" to drink bottled water? Is it irrational to qualitatively prefer one thing over another? "
tap water = free. bottled water = $1+
economically, it appears irrational to me. you are entitled to your own opinion.
Anon. 10:16
buku - means book in Malay, Balinese & Indonesian; not in the Webster as an English word
If someone doesn't understand the point you are making and asks for a clarification, it would seem reasonable to provide further information.
Anon. 9:35
Beware of any public policy passed in the name of "children".
I wonder why consumption taxes are never passed on the basis of:
1)creating a reliable stream of revenue
2) obtaining the scarce resources necessary to fund essential public services
3) the fact that consumption taxes tend to fall most on those who consume the most (ie. rich folks) or folks who engage in behavior that results in increased health costs (ie. those who smoke)
It is difficult to justify a bottled water tax upon the basis of adverse health effects of consuming water. From my observations, most people who drink bottled water tend to be more health conscious. Drinking bottled water has also become widespread just like buying a cup of brew for a fancy price at Starbucks. It's not just the well-heeled or athletes that drink bottled water.
A tax tends to discourage consumption. So why not put the tax on foods that are bad for one's health such as high in sugar, saturated fat and calories ie. soft drinks, poutine, or deep fried food. A rise in obesity seems to be a far more serious problem than drinking water from a plastic recyclable bottle. This is the same city that banned trans-fats last year.
For a tax policy to be effective, it must be generally perceived to be fair. The fact that people equate drinking sufficient water with better health tends to undercut the tax which is perceived as punishing good health choices.
We can tax oxygen since breathing it over a long period of time causes more deaths than anything else know to man.
Wouldn't it be more logical to tax oxygen on the basis that breathing oxygen creates a negative externality: namely, carbon dioxide?
No. It is stupid to drink store bought bottled tap water.
Many consumers agree. Sales of bottled tap water across America are tanking.
2007 sales growth was about half that of the year prior. For the first time it only grew in the high single digits across all channels compared to 20% in 2006.
Americans are rejecting store bought bottled tap water in favor of their own filtered tap water.
One effect has been a surge in sales of Brita water devices (up 19.6% to $55.3 million) and filters (up 6% to 96.5 million for the 52 weeks ending Jan. 27, 2008)
http://www.brandweek.com/bw/news/recent_display.jsp?vnu_content_id=1003711920
"Sales of bottled tap water across America are tanking"
Unfortunately, this statement would have to be supported by a decline in sales. A lower percentage of growth is still growth.
Couldn't slowing growth also be reflecting a slowing economy and the fact that consumers are becoming more cost conscious (retail sales at bulk food stores are also up)? Alternatively, it could also indicate that the market has been fairly well penetrated and is entering the mature phase of the product life cycle.
Can agree that filters are readily available and more economical alternative to bottled water. Bottled water, however, offers one advantage over a Brita filter, a convenient, portable container. While it is a similar product, it is delivered in a completely different way.
How many people do you see buying a coffee vs. taking a thermos to work? People like the convenience of bottled water when they are on the road.
You can think it's dumb but convenience is one element that has come to dominate more of our food choices over the past 10 years. Today, I can even buy a ready to cook meal kit (veggies, meat, seasoning, sauce) or pre-cut veggies for stir-frying (5 minutes of prep time). Paying $8.00 for a jar of butter chicken sauce seems dumb to me but there are people who would prefer to have a bit more time with their kids and a little less stress over a meal. This year, you could buy a thanksgiving turkey dinner with turkey, stuffing, gravy, mashed potatoes, 3 vegetable dishes, cranberry sauce & rolls.
The reality is that the consumer buys products that satisfy his needs. One's opinion of his choices is irrelevant to the decision and shaping government policy around someone's choices seems singularly intrusive. Just why is it the business of the City of Chicago to tax bottled water?
Chicago earned a water quality & compliance grade of excellent in 2000 & 2001 from NRDC. There are however contaminants such as trihalomethanes, haloacetic acids, coliform bacteria (2% was highest month total coliform positive in 2001) and lead (7 ppb in 2000) in the water. These are at very low levels putting Chicago's water in the 90th percentile but reports still carry health warnings for vulnerable populations including children.
In 1993, the lead levels exceeded the national EPA action level of 15ppb and Chicago had to upgrade its system. At one point, Chicago's plumbing code actually required lead service lines so high levels of lead are hardly surprising. It looks like remedial efforts have been successful however, many consumers may not be aware of this improvement.
Taxing bottled water has the appearance of a government trying to enforce a water monopoly. One has to consider that some consumers may represent vulnerable populations, such as families with young children. The choice is theirs.
@bobble: "tap water = free. bottled water = $1+"
And I can make a hamburger at home for <$1, but frequently eat a Whataburger for >$4. Should I carry hamburgers around with me all day because it would be irrational to pay 3x more for one than I could make for myself? People pay many dollars for Starbucks coffee when they could make a whole pot of Folger's coffee for the same price. Is it irrational behavior to do so, or simply preference for quality/taste?
Again, all of this normative "people should/shouldn't do X" talk is anti-free market.
skh.pcola
A cup of coffee costs 5 cents to make. The markup is staggering and people consistently litter with the empties. So how is this different from water other than the element of government monopoly (taxing the national drink might also be political suicide).
Not one person has been able to justify this tax on any other basis other than to penalize consumers for not using the government water monopoly. When you use the old..."but the bottles end up in landfill line", perhaps you can also explain why water bottles are somehow fundamentally different from soft drink bottles or tetrapaks (only a small strip of the tetrapak even gets recycled).
If it is just about not liking someone's dumb choice, then why don't we eliminate grass. Hey, you might spray it, water it or cut it with a gas powered lawnmower creating greenhouse gases, and I might not approve.
One of the few countries where such choices are determined by government is China. Greetings, fellow comrades.
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