The Comparison of Ad Valorem and Specific Taxation Under Uncertainty

The comparison between specific (per unit) and ad valorem (percentage) taxation has been one of the oldest issues in public finance. In Cournot markets, with deterministic costs structures, onventional wisdom has it that ad valorem taxation welfare-dominates specific. The objective of this paper is to shed new light on the issue by introducing uncertainty. It shows that in the resence of uncertainty, regarding firms' cost structures, and under reasonable conditions, the conventional wisdom might not hold. The implication of this, from a policy perspective, is that the precise evaluation of the two types of taxation requires an explicit consideration of cost uncertainty