A tax of 20 cents per unit of imported cheese would be an example of:
Select one: a. Compound tariff b. Effective tariff c. Ad valorem tariff d. Specific tariff
The correct answer and explanation is:
The correct answer is d. Specific tariff.
A specific tariff is a fixed fee or charge imposed on a particular quantity of goods, regardless of the value of those goods. In the case of the 20 cents per unit of imported cheese, this tax is levied based on the number of units of cheese imported, not on its price or value. Therefore, this is classified as a specific tariff.
Specific tariffs are straightforward to administer because they do not involve complex calculations related to the value of goods. The government simply collects a set amount per unit of imported cheese. For example, if 100 units of cheese are imported, the total tariff would be 100 units multiplied by 20 cents, resulting in a total tax of $20. This contrasts with other types of tariffs, such as the ad valorem tariff, which is based on the value of the goods imported, like a percentage of the total price.
One benefit of a specific tariff is its predictability. Importers can easily calculate the total cost they will incur based on the number of units they import. However, a potential downside is that it does not adjust for price fluctuations. If the price of cheese decreases, the fixed 20 cents per unit tax may disproportionately affect imports, making it more expensive relative to the value of the cheese.
In contrast, an ad valorem tariff is based on a percentage of the value of the imported goods. A compound tariff combines both specific and ad valorem tariffs, while an effective tariff considers both the nominal tariff rate and the price changes in the domestic market. Therefore, the correct classification for a tax of 20 cents per unit of imported cheese is a specific tariff.