Question

Suppose a state aims to make it easier for people to purchase school supplies for children by exempting these purchases from sales taxes. Such programs are often called "sales tax holidays." Identify which of the following would be considered an unintended consequence of this policy. 

Choose one: 

A. An increase in purchases just prior to and immediately following the sales tax holiday. 

B. An increase in prices by retailers expecting higher demand during the sales tax holiday.

C. A steep decline in sales during the sales tax holiday. 

 D. A large increase in net sales.

Answer 1

Option B

To offset sluggish sales in the weeks before and after the holiday, some retailers raise prices during tax-free weekends or reduce prices on the surrounding weekends. As a result, consumers get a worse deal, paying more for the same items during a tax holiday than they would any other day of the year.