Stretching the Inelastic Rubber: Taxation, Welfare and Lobbies in Amazonia, 1870-1910 Felipe Tâmega Fernandes Working Paper 10-032 Copyright © 2009 by Felipe Tâmega Fernandes Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author. Stretching the Inelastic Rubber: Taxation, Welfare and Lobbies in Amazonia, 1870-1910 Felipe Tâmega Fernandes† Harvard Business School October, 2009 Abstract This paper examines the effect of government intervention via taxation on domestic welfare. A case-study of Brazilian market power on rubber markets during the boom years of 1870-1910 shows that the government generated 1.3% of GDP through an export tax on rubber but that it could have generated 4.7% in total, had the government set the tariff at the optimal level. National, regional and local constraints prevented the government from maximizing regional welfare. In a context of lobbies, government budget maximization may have differed from regional welfare maximization. JEL: F14, H21, L13, L73, and N76. Keywords: Rubber, Commodities, Market Power, Optimal Tariff, Welfare, Trade and Brazil. † Newcomen Fellow, Harvard Business School, Soldiers Field, Baker Library | Bloomberg Center 173, Boston MA, USA 02163. Telephone: +1 617 495 6224, email:
[email protected]. I would like to thank Filipe Campante, Nick Crafts, Colin Lewis, Leonardo Monastério, Aldo Musacchio, Tom Nicholas, Marcelo de Paiva Abreu, William Summerhill, Jeffrey Williamson and all participants of 2009 EHA Meeting, 2008 World Cliometrics Meeting, Universidad Carlos III Madrid, Clio@LSE, LSE, USP, INSPER, FGV-SP and FGV-Rio seminars for their comments on previous versions of this paper.