Question

Einav et al. (2012) found that people who live in high sales tax areas were much more likely than other consumers to purchase over the Internet, where they were generally exempt from the sales tax if the firm was located in another state. They found that a one percentage point increase in a state's sales tax increases online purchases by state residents by just under 2%. Is the explanation for this result similar to that in the Challenge Solution? Why or why not?

 

In the Challenge Solution, Americans and Germans are both assumed to be indifferent between traditional books and electronic books, but Americans consume lots of electronic books while Germans consume virtually none because the after-tax price of electronic books is less than the after-tax price of traditional books in the U.S but in Germany, the after-tax price of traditional books is less

 

That a one percentage point increase in a state's sales tax would increase online purchases by less than 2% is due to a

A. different explanation because online goods and traditional goods are imperfect substitutes 

B. different explanation because the price of traditional goods does not change 

C. similar explanation because the price of online goods increases

D. similar explanation because consumer purchasing power decreases with the tax increase 

E. similar explanation because online goods and traditional goods are perfect complements

Answer 1

Consumer income decrease when seller put the burden of sales tax on them. Since consumers are risk-averse tax burden leads to reduce their disposable income. Consumer prefer to avoid the taxes thus, they move towards online shopping in order to exempted from paying the sales \(\operatorname{tax}\)

Evidences shows that Country G prefer printed books or traditions books over e-books while US citizens prefer e-books more than the tradition printed books, even after-tax price of traditional books is less in Country G. thus, it a contradiction situation that people prefer purchasing online after increase in sales tax. not similar to that in the Challenge solution because under Challenge Solution Country G consumes more e-books even after-tax price of traditional books is less.

Here, option \(\mathbf{A}\) is correct that is different explanation because online goods are traditional goods are imperfect substitutes thus increase in sales tax would not affect online purchase by that much percent.