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CSS Audit Tax Finance P-II
QUESTION #1221
Question 1
If a tax on a good is doubled, the deadweight loss from the tax:
Correct Answer Explanation
Deadweight loss from a tax is proportional to the square of the tax rate: \(\text{DWL} \propto t^2\). If the tax doubles (\(t \to 2t\)), then \(\text{DWL} \propto (2t)^2 = 4t^2\). So the deadweight loss increases by a factor of four. This is why large taxes are disproportionately inefficient.
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