Which statement correctly distinguishes an ad valorem tax from a specific tax?

• A. An ad valorem tax is a fixed amount per unit
• B. A specific tax is a fixed amount per unit
• C. An ad valorem tax is a percentage of the price
• D. A specific tax is a percentage of the price

Answer: (C)

Ad valorem taxes are calculated from the value of the good, expressed as a percentage of its price. This means the tax changes as the price changes: higher prices mean higher taxes, and lower prices mean lower taxes. A specific tax, by contrast, is a fixed amount per unit, so it stays the same regardless of how expensive the item is. For example, 20% of a £10 item is £2, while the same 20% would be £3 if the price were £15. A fixed unit tax might be £1 per bottle, which does not vary with price. So the statement that an ad valorem tax is a percentage of the price is the correct distinction.