Tuesday, November 4, 2008

Taxes, charges and hidden prices

For a market to be efficient, it needs to be clear what the prices of the goods are. As I am traveling, I am noticing that who prices are advertised differs notably from country to country, and I wonder what this implies for efficiency.

Take for example sales tax or VAT, depending on country. In some places, such a tax is included in the price, while in others, it only gets revealed once the transaction is concluded. It hurts the transparency of the price. We all know the example of airline tickets, where all sorts of surcharges and taxes can in some cases multiply the price. I am especially irked by this "fuel surcharge," where the ticket price could easily reflect it. In the case of hotel reservations, guests often do not know the final price until check-out. For the sale tax, it is usually guessable what the final price is, but it is annoying, and it never ends up with a round number thus needing extra change.

Why would sellers not state the real final price? Because it gives the impression it is cheaper and the potential buyer does not have the guts to cancel the transaction after realizing what the true price is? Because it makes people more aware what share of the price is attributable to taxes? (I once saw a receipt in Canada attributing the federal and provincial sales taxes to the respective prime-ministers who introduced them). Because the first mover in including taxes would face a disadvantage with respect to the competition?

Clearly, we are a situation with a Pareto dominated equilibrium. This calls for government intervention, imposing on retailers to include taxes, charges and fees in their price.

1 comment:

Anonymous said...

There are plenty of unexpected taxes that raise the price of goods and services.

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