Unit taxes and <italic>ad valorem</italic> taxes with vertically differentiated products

This article analyses a model in which a local monopolist that produces low-quality goods competes against a foreign competitive industry that produces a higher quality version of the goods. We use the model to analyse the welfare implications of introducing a unit tax on the local producer, relative to an <italic>ad valorem</italic> tax. We find parameter values for which the unit tax dominates the <italic>ad valorem</italic> tax, in the sense of increasing welfare while not reducing government revenues. This result contrasts with the mainstream results on the dominance of <italic>ad valorem</italic> over unit taxes.