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    Question

    Which of the following best explains the cascading effect of taxation?

    (1) When tax imposition leads to a disproportionate increase in prices by an extent more than the rise in the tax.

    (2) When tax imposition leads to a disproportionate decrease in prices by an extent more than the rise in the tax.

    (3) When tax imposition leads to a disproportionate decrease in imports.

    (4) When tax imposition leads to a disproportionate decrease in exports.

    A 1 only Correct Answer Incorrect Answer
    B 2 and 3 only Correct Answer Incorrect Answer
    C 4 only Correct Answer Incorrect Answer
    D 3 and 1 only Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    “Taxation over taxes” or “cascading-effect” of the taxes adds to the deadweight loss i.e. slump in total surplus of supply chain consisting of supplier, manufacturer, retailer and consumer. Due to cascading tax imposition leads to a disproportionate increase in prices by an extent more than the rise in the tax.

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