The Non-Equivalence of Specific and Ad Valorem Tariffs with Quality-Differentiated Goods

The Non-Equivalence of Specific and Ad Valorem Tariffs with Quality-Differentiated Goods

This paper is an extension of the literature inaugurated by Falvey that examines the effects of tariffs when the affected goods are quality-differentiated. I demonstrate that an ad valorem tariff may actually increase the sales and market shares of some imported qualities, and that the protection offered to the domestic industry may not be spread among all domestically produced qualities. A specific tariff also does not distribute the burden and benefits to all firms in the market. Only those qualities that are closest substitutes for imports will be affected. For either type of tariff, the total sales in the market contract only if the lowest quality is imported.