Market, in an economy, refers to the place where the buyers and sellers interact with one another, thereby reaching to decisions regarding the quantity and price of different goods and services. However, the demand-supply dynamics in a market of a country, are often influenced by the policies and regulations imposed by the government of the concerned country, one of the significant ones of which is the imposition of various types of taxes (Frank and Cartwright 2013).
Keeping this into consideration, this section of the assignment tries to summarize the discussions of the article named, “Turnbull’s online shopping tax punishes Aussie consumers: How to avoid the Amazon rip-of”, which highlights the recent decisions taken by the multinational online retail giant, Amazon, in their domain of operations in Australia (News.com.au 2018). As per the assertions of the concerned article, from July 1, 2018, the company, would launch its local website for the shoppers in Australia, from where the latter will be forced to buy commodities instead of their international online website from where the Australian customers are accustomed to buy (Forsyth 2018).
The primary reason behind this step taken by the company, as cited by the concerned article, is the changes in the tax laws in the concerned country in the recent period, which has included new regulations regarding GST on online shopping in the country. In the previous periods, taxes were only collected on the products or services which were of valuation of more than $1000. However, as the article shows, with the implementation of the new online GST laws, the GST is supposed to be collected also on the products which are of value of less than $1000 (Hatch 2018).
The article highlights the mixed responses of different sectors of people, regarding the new GST laws as well as regarding the actions of the Amazon Company in reaction to the same. While the estimated revenue of 300 million dollars, collected in the form of GST, is expected to help the government to invest in development activities in the country, however, as per the suggestions of the article, the same is expected to be decreasing the welfare of a major section of the online shoppers in the country in the coming years (Sawyer 2014). As seen from the assertions of the Australian customers, the third-party sellers on the Australian site of Amazon are much more expensive than the US site and the supply and options of products are also much limited in the former than in the latter.
Some of the opinions can be seen to be against the step taken by Amazon, in the sense that the multi-billion-dollar company, by taking this step, has been trying to evade their share of tax, thereby leading to the loss of economic and overall welfare of the general customers. On the other hand, some of the companies (like ASOS, Macy’s as well as Nordstrom) have chances of following the path taken by Amazon (Roy 2018). The tax has also been criticised by many, along with the Australian Taxpayers’ Alliance, according to whom, the tax, newly imposed, as according them it will not only decrease the welfare of the customers but will also not help in increasing the efficiencies of the producers. This, as the article highlights, has already led to the intensification of the lobbying activities of the producers, which in turn, has kept the prices of the products at higher levels than the overseas options.
The main message conveyed in the concerned article is that the imposition of online GST in Australia, in the recent period, which has been done with the objective of increasing the development of the country, is expected to decrease the welfare of the online customers of the country and is also not expected to bring efficiency in the domain of operations of the domestic retailers, which is another intension behind the implementation of GST (Kirchner 2013). This is in turn expected to reduce the overall welfare of the society in the recent periods, provided the people do not use the ways which are present to avoid using the Australian website of Amazon and to shop from the US site directly.
The concerned article indicates that the new online GST laws, which have been imposed by the government of Australia, have negative implications on the consumers (especially online customers) and shoppers in the country. The assertion made by the concerned article seems to have considerable validation and relevance and can be explained as follows:
With the imposition of online GST on all kinds of products, irrespective of their valuation, (below or above $1000) and with the cost of implementation of such laws being huge on part of the different international shopping platforms, the effects of the same can be seen in the forms of new policies which are taken by Amazon and are expected to be followed soon by other online shopping platforms in the country (Strelein 2012). To abide by the tax laws, Amazon can be seen to be launching a local website, with local retailers, thereby preventing the Australian customers access to the international options and retailers, who are often seen to be much more competitive and price-efficient than the local ones.
With the international competition being eliminated, the market power of the domestic suppliers and retailers can be seen to be increasing (as is evident from the lobbying activities of the same in the recent period), who, can be seen to be charging a much higher price for the products demanded by the Australian customers, compared to the prices charged by their international counterparts, whose services can be seen to be availed by the online shoppers at other parts of the world (Keen 2013). As can be seen from the evidences, the prices charged for different products, by the domestic retailers are considerably higher than the prices charged by the international ones, including the international shipping and delivery fees. This, in the light of the conceptual framework of economics, can be explained with the help of the following figure:
Figure 1: Effects of imposition of online GST tax
(Source: As created by the author)
As can be seen from the above figure, with the imposition of the online GST tax, more of the online shopping platforms existing in the country, is expected to leave the market or take strategies like that of Amazon, of opening a local online shopping website. This is expected to reduce the supply of goods and services, thereby giving immense market power to the domestic retailers, who in turn are also expected to face less competition in the market (Hall and Lieberman 2012). With the demand for goods and services remaining the same, among the Australian customers, the fall in the price along with the increase in market power and dominance of the local retailers, can be seen to be increasing the average level of prices of the goods and services in the country and is also expected to decrease the quantity of products and services in the country (Cowell 2018).
Thus, both in terms of prices as well as in terms of the product availabilities, the customers in the country can be seen to be adversely affected, as they are supposed to be in a highly disadvantageous position compared to the global customers, who can avail the international online shopping platforms easily (Altamirano 2015). Thus, the assertion made by the concerned article, in the sense that the newly implementing online GST laws are taxing and punishing to the Australian customers and online shoppers, can be said to be true to a considerable extent, based on the evidences as well as based on the conceptual and theoretical framework of economics.
In the contemporary period, with the phenomenon of Globalisation, trade liberalisation and technological and innovations making the global commercial scenario more integrated, inclusive and interconnected, the importance of common global market can be seen to be felt increasingly (Cavusgil et al. 2014). In this context, with the invention of internet and increasing popularity and usage of the same by people across the globe, the phenomenon of online shopping or e-commerce has been gaining increasing impetus and relevance.
Rationale behind creation of online shopping platform
Opening of new markets
The primary rationale behind the creation of the online shopping platforms in the contemporary global commercial scenario is that the same helps in opening up new and previously undiscovered markers for both the buyers as well as the sellers across the globe. While the buyers enjoy access to greater options regarding the products and services which they desire, the sellers on the other hand, enjoy higher number of clients, both domestically as well as in international framework (Laudon and Traver 2013).
Price Consistency and Efficiency
Another rationale behind the increasing importance of online shopping platform, is the aspect of higher competition and price efficiency as well as price consistency. The customers can compare different prices for the same product, provided by different retailers and can thus increase their welfare. The online shopping platform thus promotes transparency (Martens 2016).
The creation of online shopping platform leads to the abolition of a considerable number of intermediaries as the customers, mostly interact with the direct sellers. This in turn, by reducing the number of middlemen, increases the profit and the welfare of both the customers as well as producers and the amount of dead-weight loss is less in the aspects of online shopping platform. This in turn, makes the online shopping platform a win-win situation for both the producers as well as the customers (Jarrow and Larsson 2012).
These are the primary rationale behind the creation of the online shopping platform in the recent period.
Online shopping platform and market efficiency
In terms of the conceptual framework of economics, efficiency in a market, refers to a situation, where maximum level of outputs is produced by using the available resources and all the parties or agents are at a situation of maximum welfare. That is, in an efficient market situation, the welfare of any of the participants in the concerned market cannot be increased without decreasing the welfare of some other participant in the same market (Jarrow and Larsson 2012).
In this context, the online shopping platforms contribute in increasing the efficiency of the markets in the following way:
- Due to the presence of many sellers (both national and international) of the same products in the online shopping platforms, the level of competition is higher, which in turn prevents the sellers to gain profits above their marginal costs, which in turn leads to creation of efficiency in resource allocation in the market, which is usually present in a perfectly competitive market, which can be shown as follows:
Figure 2: Efficiency in Competitive Market
(Source: As created by the author)
- On the other hand, the online shopping platform, by expanding the markets for both the customers and the producers, diminish any kind of demand or supply bottlenecks which usually exist in traditional domestic market, which can be shown with the help of the following figure:
Figure 3: Demand-Supply dynamics in a market
(Source: As created by the author)
In the traditional markets, there often arise situations of excess supply or excess demand in the domestic scenario, which in turn, makes either the producers or the customers worse off. However, with the creation of online shopping platforms, both the producers and the customers can access multiple options, which in turn leads to decrease of the demand or supply bottlenecks, which in turn, helps the price and quantity to reach the equilibrium level, thereby contributing to the efficiency in the market (Pigou 2017).
- The decrease of intermediaries due to the increased usage of online shopping platforms, decreases the scope of creation of dead-weight loss, thereby increasing the allocative efficiency in the market (Kline and Moretti 2014). The market efficiency also increases due to the presence of transparency and also due to the presence of increased competition among the sellers.
Thus, from the above discussion it can be seen that the creation of online shopping platform leads to increase in the level of market efficiency.
Online shopping tax and efficiency of domestic retailers
The online shopping tax, as can be seen to be imposed by the Government of Australia, in the recent period, was implemented by the same with bilateral objectives, which are as follows:
- To increase the efficiency and welfare of the Australian retailers by driving out unfair competitions (specifically from the huge multinational retailers and more cost-efficient online shopping platforms)
- To increase the revenue generation of the government for the purpose of investing in the development activities, thereby ensuring the increase of the societal welfare as a whole (Raskolniko 2012)
The rationale behind the implementation of such a policy has been the notion that with the decrease in the intensity of competition from the foreign multinationals, the domestic retailers will face greater demands, thereby increasing their operations, thereby enjoying economies of scale and cost efficiencies, which in turn would have helped in efficient pricing of the products and increase in the overall efficiency of the Australian retailers (Canto, Joines and Laffer 2014).
But the same did not seem to happen in case of Australia, as can be seen from the evidences put forward by the article taken into consideration, which shows less than expected revenue generation by the government and also considerable presence of inefficiencies on part of the domestic retailers in the concerned country. As is evident from the contemporary commercial scenario of the country, the imposition of the online GST by the government has led to consequences like that of intensified lobbying activities on part of the major retailers in the country and also production and selling of products at prices much higher than that of the price levels which can be seen to be existing in the online overseas shopping platforms for the similar types of products. The main reasons behind the presence of such high prices of the local products can be attributed to factors like the presence of different negative pressures like that of zoning laws, cumbersome production costs (like electricity costs and overhead costs), the strict labour laws in the country and also due to the presence of aspects like red tape (Millar 2014). All these factors, cumulatively, indicate that the imposition of the new online shopping tax laws by the government of Australia has not considerably contributed in increasing the level of efficiencies of the domestic retailers operating within the concerned country.
Effects of online shopping tax on surplus of an economy
The online GST tax or the online shopping tax, is a kind of indirect tax as the same is collected by the intermediaries (sellers) on behalf of the government but the ultimate burden of the tax is borne by the final consumers of the different goods and services, on which the tax is imposed. The effects of imposition of such a tax, on the overall surplus of an economy, can be shown with the help of the following figure:
Figure 4: Effects of imposition of online shopping tax on surplus of an economy
(Source: As created by the author)
As is evident from the above figure, in the initial period (before imposition of the tax):
Consumer surplus = A+B+C
Producer surplus = D+E+F
Deadweight Loss = 0
However, after the imposition of the tax:
Consumer Surplus = A
Producer Surplus = F
Revenue of the government = B+D
Deadweight Loss = C+E
Thus, the imposition of online shopping tax (a form of indirect tax) can be seen to be decreasing both the consumer surplus and the producer surplus as compared to the same in the pre-tax situation and in spite of the revenue generation of the government from such a tax, there occurs considerable and visible amount of deadweight loss in the economy (Bös 2014). Thus, it can be concluded, that with the imposition of online shopping tax, the overall surplus of an economy decreases and deadweight loss occurs in an economy.
The online shopping tax, as imposed by the government of Australia, had the primary intention to make the multinational companies, operating in the domestic boundaries, pay their share of taxes as in the absence of the same, these already cost-effective and large multinationals would have gained an unfair competitive advantage over the domestic retailers operating in the concerned country (Persson and Tabellini 2012). The imposition of the tax, was also done, with the intention of making the domestic sellers more competitive and profitable and also for collection of higher revenues on part of the government, which in turn, would have helped the government to increase the overall welfare and development of the society and the economy of Australia.
The impacts of the online GST laws can be both short-run as well as long-run, which can be shown as follows:
With the imposition of the concerned tax and due to the presence of higher level of implementation costs for the online shopping websites, the same are expected to leave the market or to reduce their operational domains, which in turn, is expected to reduce the level of supply of commodities in the economy, as the major source of such products will then be the domestic retailers. In the short run, the supply cannot be increased by the domestic retailers as abruptly as that of the imposition of the tax laws (Persson and Tabellini 2012). This, in turn will lead to an inelastic supply of products in the short run, the effects of the same being shown as follows:
Figure 5: Short run effects of tax imposition
(Source: As created by the author)
With the online shopping platforms exiting from the market, in the short run the supply of commodities reduces and the supply curve also becomes comparatively inelastic due to the presence of only limited number of domestic retailers with limited supply which cannot be increased immediately. This leads to considerable increase in the price of the commodities in the economy.
Long run effects
In the long run, however, the high price of the products in the economy will encourage new domestic retailers to venture in the market and will also induce the existing ones to increase their supply for increased profitability, the result being as follows:
Figure 6: Long run effects of taxation
(Source: As created by the author)
In the long run, however, in the presence of high prices and profitability more sellers are expected to enter in the market and the existing sellers are also expected to increase their supply, which in turn leads to rightward shift of the supply curve and the long run supply curve is more elastic than the short run one, in this case, which in turn leads to the increase in the quantity of the products and also a fall in the level of prices of the same (Clark and Juma 2013).
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