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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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