Why Rs 30 discount feels like a jackpot: The Endowment Effect behind GST 2.0

We all shop online—and every now and then, we stumble upon a coupon or a free-delivery offer. Suddenly, we’ve saved Rs 30. It’s not life-changing money; it might barely buy a chocolate. Yet the tiny win leaves us grinning. Why does this modest Rs 30 “consumer surplus” feel so satisfying?

That’s the magic of the endowment effect. This behavioural bias suggests that people assign more value to something once they feel they already own it (Kahneman, Knetsch & Thaler, 1990). In this case, we’ve mentally “owned” the full price of the product—so when the cost drops, the difference feels like a gain. Even a small saving becomes surprisingly rewarding.

On September 22, 2025, the Indian government rolled out GST 2.0. This new structure has reduced tax on goods and services to only 5 per cent and 18 per cent. Certain essential goods will have 5 per cent to 0 GST to be paid on them. This change intends to increase the affordability of essentials, increase consumption, and nudge the economic growth of our country. Initially, there will be citizens who think this is a temporary bliss. The rates might go up again. For this, policymakers must be transparent about the longevity of this GST reform, and businesses with boards stating that the change in prices with the new GST implemented for their products will reinforce this gain for them. 

Now we go in for our usual shopping trip in the supermarket and see that the shampoo that used to cost Rs 170 is now perhaps Rs 150. Immediately, our minds clock this as a profit for us, the consumers. Gradually, our mind “owns” this lower price. But imagine the rates skyrocket again, or the tax is increased, what would happen? We will be outraged. How dare they increase the prices? There will be #betrayal trending all over X. But the increased price here is the same we were paying before GST2.0. So what changed? Here, the Endowment effect bridged the gap between the old price and the cheap one. It has ingrained the expectation of a cheaper rate of goods and services. It throws us into a frenzy because, as they say, Loss looms larger than gains. 

Health insurance policies now have zero GST! Neither the product nor its quality has changed, but the “Zero GST” label printed in bold instantly alerts the brain: “This is such a good deal—better get it before the offer ends!” Here, the attractive offer immediately influences our sense of psychological ownership over the deal. Loss aversion and the endowment effect kick in: we don’t want to lose this offer, and we feel as if we’re profiting from it. As a result, the demand for this good increases.

Another thing to note is that while the Rs 20 biscuit is still the same price, we now get a better quantity. This means that although the nominal value has not changed much for certain products, their real value has increased, allowing both consumers and producers to prosper. While the endowment effect keeps us happy, this reform will make economists very happy. This policy is a perfect example of a fiscal stimulus package. It reflects Keynes’ theory, which emphasises the need for government intervention to support the economy.

If we look at the paper, the change made is very low, but comparatively, our brain's celebration is way out of proportion. Every penny saved is put into the consumer surplus, which increases the potential ability of consumption, which means increased demand for goods; in turn, our Nation has a boost of economic growth. This is a step in the direction of the overall soaring of our economy in the right direction.  

To conclude, as India cuts taxes and our wallets relax, it's our brain that is celebrating with the magic of the Endowment Effect. 

References:

1.    Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental tests of the endowment effect and the Coase theorem. Journal of Political Economy, 98(6), 1325-1348. https://www.jstor.org/stable/2937761