Simulation of Alternative Tax Policies for Sugar-Sweetened Beverages : Consumer and Producer Outcomes in Mexico

We estimate the effect of the tax of one Mexican peso (MP) per liter of sugar-sweetened beverage (SSB), implemented since January 2014, on consumer and producer outcomes in urban Mexico. We also simulate the effect of the recommended tax of two MP per liter of SSB. Based on purchase data from urban households in 2012-2015, we implement a structural model that accounts for the simultaneous response by consumers and producers in the face of the tax implementation. The structural model is composed of a random-coefficients logit demand model and a linear-pricing Bertrand supply model. Compared to a simulated counterfactual with no SSB tax, the one-MP SSB tax was fully shifted to SSB prices, and SSB purchases decreased by 15.02%. Conversely, purchases of untaxed beverages increased by 4%. For the two MP SSB tax, we predict a full tax pass-through to prices and a reduction in SSB purchases by 27.61%. From a welfare perspective, the deadweight loss (i.e., losses in consumer surplus and profit exceeding tax revenue) increases with SSB tax increases. Future research needs to assess long-term health benefits