Which type of duty combines both ad valorem and specific duties?

The correct answer is compound duty, which is a tariff mechanism that incorporates both ad valorem and specific duties. Ad valorem duties are based on the value of the goods, typically assessed as a percentage of the total value. In contrast, specific duties are fixed amounts calculated per unit of goods, such as per kilogram or per item. By combining these two types of duties, a compound duty allows for a nuanced approach to import taxation that can reflect both the monetary value of the goods and the quantity being imported. This ensures that the tariff structure is more equitable and can adjust to fluctuations in commodity prices and import volumes, providing revenue stability to the government while also impacting trade behavior.

Other options, like free duty, refer to scenarios in which no tariffs are applied, while variable duties can fluctuate based on market conditions but do not directly combine ad valorem and specific elements. Excise duty typically pertains to domestic taxes on specific goods rather than customs tariffs. Thus, the definition and function of compound duty distinctly position it as the correct choice in the context of combining various duty types.