Consider a situation where a government is deciding between two differ

Consider a situation where a government is deciding between two different taxes on beer. The first tax is $2.88 per case and the second is a tax of one cent per ounce placed on beer. Both are paid by the supplier.

Assume both will raise the same amount of revenue this period. Pretend you are an advisor to the government and explain to them which tax they should enact.

ANSWER

After carefully considering the two taxes, in my opinion this government should adopt the ad valorem tax, i.e., the tax of one cent per ounce of beer. The primary reason I argue in favor of the ad valorem tax is that the ad valorem tax will change in response to change in price. Thus if prices rise in the future the tax will not need to be changed in order to keep up with inflation. In addition, the unit tax on a case of beer could be more distortionary than the ad valorem tax because producers have an incentive to increase the number of cans in a case (if possible) or the number of ounces in each can in a case.