Export Tariff, Welfare and Public Finance: Nitrates from 1880 to 1930

The traditional exception to the welfare reducing character of protectionism is based on the optimum tariff argument. If in addition the market power can be traced back to control of a necessary, cero substitution natural resource type input, then the corresponding trade tax and the shadow price of the resource are on common ground, eventually the former is also an instrument for charging the latter. In the political economy context such an export tax is also a device for nationalizing the income stream the scenario promises; but also, once this revenue takes over a significant fraction of fiscal income the country’s Treasury may turn into a conservative force impeding tax innovations dictated by dwindling monopoly power. Specially so if government comes to display an agency type of behavior and the revenue reductions to be derived from the adaptation of the tariff to changing demand conditions concentrate in the present, meanwhile expected benefits of such an action extend into the future. Based on a simple analytical framework and exploring the issue with a set of simulations, the optimality of the export tax on nitrates is evaluated for its complete lifespan extending over half a century. Its nil capacity for adapting to changing conditions is then interpreted in terms of the assumed incentive structure of governments, but recognizing the inherent difficulties in predicting future market power and therefore of tax design.