Answer :


When the tax is imposed on commodities such as steel, matches, clocks, and iron, there will be changes in the price level of the other commodities. There will less effect on the imposition of tax on the finished goods such as matches, clock, and cloth. Since these goods are final consumption goods and being directly used by the consumer, it will result less towards the increase in the price of other commodities. Whereas when there is an increase in the tax rate on intermediate goods such as iron and steel, it will affect the prices of the other commodities. These goods will increase the price of the other commodities because they are intermediate goods, which are used for further consumption. Therefore the increase in the tax rate will increase the price of the commodities and the commodities will become costly. When these commodities are used for the production of the other goods, then the price of those final goods rises.


Example: when there is an increase in the tax rate on the commodities on the products of iron and steel, it will increase the price of iron and steel. These iron and steel is used for further production activities such as car manufacturing, construction works, and other heavy industries. Ultimately when there is an increase in the price of iron and steel, it will result in an increase in the price of the final goods such as cars, houses, bikes, etc.,


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