Posted on by John Sloman

Getting burnt by VAT

Skin cancer is on the increase in the UK. Calls are thus being made by both retailers and cancer charities for a cut in VAT on sun cream.

At present the VAT rate on sun cream in the UK is the standard rate of 17.5%, which is due to increase to 20% in January 2011. But would cutting the rate to 5%, as is being proposed, be effective in cutting skin cancer rates? What information would you, as an economist, need to assess this claim?

Articles
Government urged to cut VAT on sun cream amid skin cancer fears Guardian, Rebecca Smithers (27/7/10)
Brits Get Burned By Vat Rise On Suncream PRLog (7/7/10)
Why we still think bronzing is tan-tastic Irish Independent, Susan Daly (27/7/10)

Evidence on sun creams
Sunscreen Wikipedia
Sun creams Cancer Research UK

Questions

  1. What would determine the incidence of a cut in VAT on sun creams between consumers and retailiers?
  2. If there were a 50:50 incidence of a VAT cut between consumers and retailers and the VAT was cut from 17.5% to 5%, what percentage fall in the retail price would you expect?
  3. Assume that the price elasticity of demand for sun cream is –1 and price elasticity of supply is +1, how much would sales of sun cream rise if the VAT rate fell from 17.5% to 5%? Are these realistic values for the price elasticity of demand and supply?
  4. Under what circumstances may promoting the use of sun creams encourage the development of skin cancer?
  5. Are people being rational if they choose to expose themselves to the sun for long periods in order to receive a ‘fashionable’ tan? How are time preference rates (personal discount rates) relevant here?
  6. What market failures are involved in the tanning industry? If the use of sunbeds contributes towards skin cancer, should they be banned?