Question

Under competitive market it does not matter whether you use advalorem or specific tax but in

case of monopoly the effect of advalorem tax and specific tax are quite different. Advice a
government on whether to use an advalorem tax or a specific tax if it wants to increase revenue by
imposing tax on the good that is produced by a monopoly firm.

Answer 1

[AI-generated answer — Bot]

In this case, it is advisable for the government to use an advalorem tax. An advalorem tax is a tax based on the value of a good or service, and it is typically more effective in raising revenue than a specific tax. This is because an advalorem tax increases the cost of the good or service, which in turn reduces the demand for it. This decrease in demand leads to an increase in the price of the good or service, which in turn increases the revenue generated by the tax. In the case of a monopoly, the firm has the ability to set the price of the good or service, so an advalorem tax can be used to increase the price of the good or service and thus increase the revenue generated by the tax.