Question

9. We know that in economics, we have various instances of equivalence. For example, it is argued that for any specific tariff one can find an equivalent ad valorem tariff; and that for any quota one can calculate a tariff equivalent. Can you think of a situation when

a. a specific and an ad valorem tariff are not equivalent

b. a tariff and a quota are not equivalent.

(Feel free to use internet resources here and make any argument you find relevant. The point is for you to see the effect of differences in policy institution under different circumstances)

Answer 1

Answer. Specific tax is a fixed amount of tax on per unit if good. While, ad valorem tax is the tax as the percentage of price of the commodity. The effect of the type of taxes can be very different under different situations and different category of goods given the same tax rate.

Ad valorem tax are generally used by government to raise revenue. Taxes being progressive in nature are generally applied to daily use products, as they restrict the demand to some extent by raising the prices.

However, specific taxes are generally imposed by government to restricrestricrethe consumption, like on alcohol. A specific tax on alcohol have higher chances to reduce its consumption by more than an ad valorem tax.

Similarly, putting quota on imports can be more effective in control imports as compared to tariff. Producers can give higher for imports and can pass on the burden to consumer in form of prices. However , quotas can be more useful in protecting domestic consumers and producers.