Economics Case Study: Impact Of Online Shopping In Australia
Task:Answer all questions. Limit the word count of your assignment to less than 3000. Please use diagrams in your answer when appropriate.
- In your own words, summarise the article. What is the main message of this article?
- The article states that “The Australian Taxpayers’ Alliance said the Turnbull governments online shopping tax punishes Aussie consumers and denies shoppers the same choice available to billions of shoppers worldwide.” Do you agree with the above statement ? Make sure that you justify your answer with the relevant economic theories.
- Explain the rationale behind the creation of an on-line shopping platform. Does the on-line shopping platform make a market more e?cient?
- Do you agree that such an on-line shopping tax make Australian retailers more e?cient? How does this on-line shopping tax a?ect the total surplus of an economy?
- If multinationals aren’t forced to pay their fair share of tax, they will have a competitive advantage over retailers here in Australia, on our own main streets and in our shopping centres.” What will be the short-run and long-run consequences of such a tax policy on Australian domestic retailers.
Introduction: Online shopping has been a booming market since the start of the decade and has become one of the major areas of revenue earned through world markets. The following economics case study is based on an investigation and analysis of Frank Chung’s article about Amazon’s response to Turnbull's online shopping GST laws. The new GST laws are causing a loss for Aussie consumers. This economics case study, therefore, proposes to outline the implications of taxes incurred from online shopping within the domestic market of Australia with a specific focus on big multinational companies. Tax theories such as Benefit theory, Cost of service theory and Ability to pay theory have been applied to evaluate the way in which big multinational companies such as BP, ExxonMobil and BUPA respond to online shopping taxes.
1. Summary of the given article
The given article has been published by Frank Chung and this article was all about how the Turnbulls tax on online shopping in Australia had punished the consumers of the country. This economics case study has also focused on the way of avoiding rip-off of one of the most famous online shopping site across the whole world named Amazon. It has been observed by Frank Chung that the famous giant of online retail marketing would likely to attempt forcing all the consumers of Australia for using its local website.
Such local website features very smaller yet more expensive varieties of commodities compared to the corresponding international site. From the side of the owners of Amazon, it has been told that the change has happened in response to the new laws on goods and services imposed by the government. This needs overseas business for collecting taxes on those commodities which are priced under $1000 (amazon.com.au, 2018).
Famous treasurer Scott Morrison has slammed the move of Amazon by saying that there are many other choices of online websites to shop from and if Amazon wants to quit then they surely can. Amazon is one of the most famous technologically advanced companies throughout the whole world. Many economists have found it very hard to believe that just because of a simple imposition of a sales tax on the commodities; Amazon becomes unable to find out a technological solution.
Furthermore, it has been observed in this economics case study that the customers of Amazon that many commodities which are sold by some third-party sellers seem to be much more expensive significantly on the website of Australia. This implies that it has been cheaper to purchase already from the U.S and simultaneously provide the fees of shipping.
As per the given article, from 1st July, it has become a little bit difficult as well as more expensive to purchase goods from the site of Amazon international. However, there is still a nice opportunity that such purchase will still be better compared to pay some sort of inflated prices mentioned in the Australian site. One possible way of doing it can be that they require to sign up for a virtual private network. Then they can switch to an IP address of U.S. There are many people who are already using this in order to trick some online streaming services like Netflix into thinking that they are staying inside U.S for getting around the content blocking. The consumers have so many options of cites to select from like Express VPN, TunnelBear, Private Internet Access and NordVPN (australia.gov.au, 2018).
The Australian consumers can also log in or sign up for getting an account with ShopMate, Shipito or Parcel. These are some available examples of freight forwarding services. Such services give the consumers a U.S address for giving to the retailer and after that, they ship the whole package to Australia against a particular fee.
2. Whether the Turnbull governments online shopping tax punishes the Aussie customers and has denied shoppers the same choice which is available to the customers across the whole world or not.
It must be remembered in this connection that any type of perfectly competitive market can be defined as a market structure in which market competition exists at the highest possible level. Following are the basic characteristics of a perfectly competitive market:
- As commented by Starkie (2016), there is a huge number of sellers and buyers in the market.
- Homogeneous products are produced by each and every firm.
- There is no government intervention
- The importance of consumer surplus and producer surplus is very important as it helps in understanding differences and gaps in this connection. As commented by Cooper (2015), producer surplus can be defined as the difference or the gap between the lowest price that a producer would intend to accept and the market price.
In this context, the alliance of Australian Taxpayers said that the tax imposed by the Turnbull government on online shopping has punished Aussie customers. This has also denied the shoppers the same selection of choice which is available to a huge number of consumers across the whole world. Hence the above statement can be agreed. This can be explained in terms of benefits theory, cost of service theory and ability to pay theory of taxation.
Figure1: Impact of Tax
(Source: economicshelp.org. 2017)
Benefit theory is based on taxes which are to be paid for expenditures of a public good. As per this theory, customers must pay according to the things which they get. If Australian customers are not getting the required quality of product at a reasonable price then obviously they can shift their choice from Amazon to any other shopping site.
According to the cost of service theory, the amount of cost incurred by the government while providing the public commodities must be considered as a base of taxation ((Lee et al. 2016). On the other hand, the ability to pay theory states that taxes should be imposed according to the consumer’s ability to pay. In this case, if people in Australia do not have the ability to pay the price in Amazon because of the imposition of a business of tax, then they surely cannot purchase from there.
3. The rationale behind creating an online platform for shopping and whether this platform makes a market more efficient or not.
Online shopping was at first invented by Michel Aldrich in the UK. This is basically a particular form of e-commerce that allows the customers to purchase commodities and services directly from the seller through the internet. The whole process of online shopping is done just by utilizing a web browser. Following are the reasons behind the creation of a platform for online shopping:
Convenience: It is known that online shopping websites are generally available throughout the whole day. Therefore consumers can purchase their requirements whenever they wish to buy from there. This was one of the major reasons for creating an online platform for shopping by making their shopping hazard free (Waterlander et al. 2016).
Better price: Another important rationale behind creating online shopping sites was making the prices of commodities and services cheaper as well as better so that consumers can pay a reasonable price for the product they want to buy. In case of online shopping, usually, products come to the consumers either from a manufacturer or from the seller directly without any involvement of the third party.
Comparison of prices: One of the most important reasons for making online shopping platform is that with the help of these consumers can compare the prices of the same product from various websites. Since in case of online shopping the same brand is available in so many sites so it becomes easier for the consumers to compare the prices and then purchase the product which seems cheaper to them (Anaf et al. 2017).
Variety of products: Consumers can get various brands as well as commodities from various sellers at just on a place. This is an important reason for the creation of online shopping sites that consumers can avail all the brands whose stores are far away from their house (Shao, Li & Hu, 2014).
It must be remembered in this connection that the availability of perfect information is very much important in order to function a market efficiently. However, in the situation of the practical world, the available information is very rarely perfect. As a result, markets continue to become inefficient. It has been observed that in most of the nations, regulations in a market attempt for making information fair as well as consistent. According to Wu et al. (2014), it is known that perfect information is a kind of basic assumption of various types of economic models which states that all the participants of a market will have similar information at the same time.
In a perfectly competitive market, it has been assumed that perfect information regarding price and the supply of the commodity is always available in the market. In such a market, a firm cannot influence market conditions and price of products. Since perfect information is available in the market, a single firm acts as a price taker as it takes the price from the overall industry. It cannot increase its price and any rational producer cannot lower any price just below the given market price. This is the reason for which a competitive market is more efficient than any other markets. Usually, allocative efficiency is observed in a perfectly competitive market.
4. Do you accept that tax on online shopping makes retailers in Australia much more efficient? How does tax on online shopping affect total surplus of the overall economy?
Tax on online shopping could make domestic retailers of Australia more efficient since the new online GST laws proposed by the Turnball Government demands overseas businesses to collect taxes on products that cost less than a thousand dollars ($1000) (Ntanet.org, 2018). Initiating such a move might adversely affect Australian consumers since adding GST taxes means an additional tax to be paid by the consumer apart from the price of the product they are buying. The new GST tax for online shopping might prove profitable for multinational companies that are doing business with Amazon but there is a flip side as well (Ntanet.org, 2018). Since added tax will mean extra costs to be paid by consumers for a given product, the consumers might not decide to buy that product from Amazon any longer (Li 2018). This could happen due to the fact that the consumer might find that particular product from a local retailer at a much lower price and get the added benefit of not having to pay high rates of GST. Therefore, the overseas companies (multinational companies) might lose on some of the valued consumers due to its added tax policy. For example, a consumer finds that a certain brand of clothing is available at the Amazon's Australia site for 670 dollars whereas the same clothing is available for 350 dollars at a local retail store (Ntanet.org, 2018). Therefore, in this case, Li (2018) argues that domestic retailers will be the ones more profitable and hence more efficient in serving the customers. The competition will be comparatively low in the retail market if consumers despite to switch over from online shopping to retail shopping due to added taxes.
Figure 3: Producer surplus Graph
(Source: economicshelp.org. 2017)
Figure 4: Consumer surplus Graph
(Source: economicshelp.org. 2017)
Tax on online shopping can affect both the producer surplus and consumer surplus on various levels. The pattern in which the buyers and sellers participate in the market for a particular commodity shows the way the introduction of taxes will affect the consumer and producer surplus dynamic. One the one hand, an introduction of taxes could negatively affect the overall surplus since both consumer and producer surplus could fall. For example, if a product is priced at 8 dollars with an added tax of 1 dollar, then the buyer who has been willing to pay 9 dollars for the product, will now pay only 2 dollars (Ntanet.org, 2018). The supplier, who has been receiving 6 dollars earlier, will now not receive any extra amount due to the increased price. (Swank 2016) argues that on the other hand, a deadweight loss can occur if high taxes make the producers reallocate their resources towards production of other low-taxed goods. If buyers such as MNCs (Amazon) are sensitive to price changes then a deadweight loss is negatively affected. If on the other hand, suppliers are sensitive to price rises, then they may decide to exit the market, causing a loss to consumers (australia.gov.au, 2018)
5. What will be the consequences in the short run and long run if multinationals are not forced to give their tax share and as they will get a benefit over retailers in Australia?
Dootson and Suzor (2015) state that multinational companies are bound to incur benefits if they are not forced to give their share of taxes since the exemption of taxes will let them have an additional advantage over domestic retailers. In this case, if MNCs in the Australian domestic market are allowed exemption of taxes then they will be able to price their products without the added burden of taxes being added to the total cost of the product. The addition of tax to the price of a product affects the overall performance of the product greatly since the buyers and producers are affected simultaneously (Picard et al. 2016). Hence, if MNCs like Amazon avoid levying taxes then they will be able to attract more consumers since they will be able to offer their products at a competitive rate, rivalling that of the domestic market. For example, if a local retail store at Australia provides a product at 10 dollars inclusive of all taxes, then the same product from an MNC will provide it for 8 dollars since the product is free from taxation. Thus, the short-term consequences for this strategy will be a significant increase in profits for the MNC. On the other hand, Tyers (2015) stated that domestic retailers are liable to lose their customers. However, retail markets are likely to gain in the long run since they will try to lower their prices in order to stay competitive in the market. If by lowering their prices, they are able to attract customers, then they will stay ahead than the MNCs like Amazon in the long run. Therefore, the addition of taxes to a product greatly influences the performance of retail markets. In addition, MNCs are also affected since taxes affect their entry costs.
It can be concluded in this economics case study that consumer surplus is the gap in between the amount that the consumers are actually intending to pay and the amount that they are actually paying which is the market price. It must be noted in this context that total surplus is the sum of consumer surplus and the producer surplus which can help Amazon to understand its market share. If the amount of consumer and producer surplus is known in Amazon then total surplus can easily be calculated. Therefore it can be concluded in this economics case study that if Amazon cannot cope up with the current structure of taxation in Australia, then they just need to find out other ways to survive. They can reduce their cost of production in this connection as well.
Li, J. (2018). Protecting the Tax Base in a Digital Economy.
Starkie, D. (2016). Aviation markets: studies in competition and regulatory reform. Abingdon: Routledge.
Cooper, B. (2015). Class of 2025: the future finance professional. Future proofing the profession: preparing business leaders and finance professionals for 2025, 81-87.
Dootson, P., & Suzor, N. (2015). The game of clones and the Australia tax: Divergent views about copyright business models and the willingness of Australian consumers to infringe. UNSWLJ, 38, 206.
Picard, R. G., Davis, C. H., Papandrea, F., & Park, S. (2016). Platform proliferation and its implications for domestic content policies. Telematics and Informatics, 33(2), 683-692.
Shao, J. B., Li, Z. Z., & Hu, M. Y. (2014, August). The impact of online reviews on consumers' purchase decisions in online shopping. In Management Science & Engineering (ICMSE), 2014 International Conference on (pp. 287-293). IEEE.
Swank, D. (2016). Taxing choices: international competition, domestic institutions and the transformation of corporate tax policy. Journal of European Public Policy, 23(4), 571-603.
Tyers, R. (2015). Service Oligopolies and Australia's Economy?Wide Performance. Australian Economic Review, 48(4), 333-356
Wu, L. Y., Chen, K. Y., Chen, P. Y., & Cheng, S. L. (2014). Perceived value, transaction cost, and repurchase-intention in online shopping: A relational exchange perspective. Journal of Business Research, 67(1), 2768-2776.
Anaf, J., Baum, F. E., Fisher, M., Harris, E., & Friel, S. (2017). Assessing the health impact of transnational corporations: a case study on McDonald’s Australia. Globalization and health, 13(1), 7. [online] Retrieved from < https://globalizationandhealth.biomedcentral.com/articles/10.1186/s12992-016-0230-4>
Lee, A. J., Kane, S., Ramsey, R., Good, E., & Dick, M. (2016). Testing the price and affordability of healthy and current (unhealthy) diets and the potential impacts of policy change in Australia. BMC Public Health, 16(1), 315. [online] Retrieved from < https://bmcpublichealth.biomedcentral.com/articles/10.1186/s12889-016-2996-y>
Waterlander, W. E., Blakely, T., Nghiem, N., Cleghorn, C. L., Eyles, H., Genc, M., ... & Michie, J. (2016). Study protocol: combining experimental methods, econometrics and simulation modelling to determine price elasticities for studying food taxes and subsidies (The Price Exam Study). BMC public health, 16(1), 601. [online] Retrieved from < https://bmcpublichealth.biomedcentral.com/articles/10.1186/s12889-016-3277-5>
amazon.com.au(2018). Amazon. Retrieved from < https://www.amazon.com.au/>
australia.gov.au(2018). Online shopping. Retrieved from < https://www.australia.gov.au/information-and-services/it-and-communications/online-shopping>
economicshelp.org. (2017) Consumer surplus and producer surplus Retrieved from: https://www.economicshelp.org/blog/glossary/consumer-surplus/
jstor.org. (2016) Ability to pay theory Retrieved from: https://www.jstor.org/stable/pdf/1806989.pdf?seq=1#page_scan_tab_contents
jstor.org. (2016) Ability to pay theory Retrieved from: https://www.jstor.org/stable/pdf/1806989.pdf?seq=1#page_scan_tab_contents