Chapter 4: Problem 1

Describe a specific tariff, an ad valorem tariff, and a compound tariff. What are the advantages and disadvantages of each?

Short Answer

Expert verified

A specific tariff is a fixed fee per unit of goods, simple to administer but can be unfair. An ad valorem tariff is a percentage of the value of goods, more fair but riskier in terms of fraud. A compound tariff is a mix of both, allowing design flexibility but can be complex and dispute-prone.

Step by step solution

Definition of Specific Tariff

A specific tariff is a fixed fee or tax that is applied per unit of a good. This means the same amount of tax is applied to each unit, regardless of its value.

Advantages and Disadvantages of Specific Tariff

Advantages: Simple to administer; Disadvantages: They can be unfair as they don't consider the price variations. Two units of the same product but of different quality and price would be taxed the same.

Definition of Ad Valorem Tariff

An ad valorem tariff is a percentage of the value of the good that is being imported. Instead of levying a fixed fee, the tax is applied on the value of the goods.

Advantages and Disadvantages of Ad Valorem Tariff

Advantages: More fair as it considers the price variations; Disadvantages: More susceptible to fraud since it's based on reported value and could be harder to administer, since it requires valuation of goods.

Definition of Compound Tariff

A compound tariff is a combination of a specific tariff and an ad valorem tariff. It has both a fixed fee and a percentage of the value.

Advantages and Disadvantages of Compound Tariff

Advantages: Can be designed to be both simple and fair; Disadvantages: Can be complex to administer and can lead to greater chances for disputes.

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