absolute. For if the country receiving such a commodity can oblige the country exporting it to receive payment in imports which enjoy a similar scarcity value, neither nation can be said to enjoy an advantage over the other. If Cape Colony exchanges diamonds for the Standard Oil of the United States, there is no presumption that either country gets the advantage of the other. For if De Beers has a closer control of the output in price of diamonds than the Standard Oil Trust has of oil and its substitutes, the balance is perhaps redressed by the fact that oil represents a more urgent need than diamonds, and so the sale can be extended with less chance of spoiling the market. We are, however, not entitled to assume that America can only send oil to Cape Colony on condition of receiving diamonds in return. The question, "What determines the goods we buy and the goods we pay with?" has not yet been put and answered. We must therefore take the case of a country exporting goods produced at an advantage to a country from which it receives goods produced at no such advantage, and ask what power, if any, the latter possesses to redress the balance.

§ 2. We will first assume, not only that the foreigners possess an advantage in production, but that for export purposes, at any rate, they act in unison, fixing a monopoly price for their goods. The case, in fact, is that of a trust or combination using its power, not to "dump" cheap goods, but to fix

prices for exported goods which give a premium on the margin or most expensively produced portion of its supply. If the Standard Oil Trust can place oil in the British market at 6d. a gallon, whereas no other adequate supply is available at that price, it need not supply oil at 6d., but may place the price considerably higher, holding in reserve the power to break any outside competition which may intercede by lowering the price to 6d. or even less. Thus, endowed with a virtual monopoly of the British market, it may fix the price at 8d., calculating that the aggregate of sales at that price will yield the largest net profit on the trade. This price will be fixed by reference to the marginal expenses of production, which will probably be lower per gallon as the output is increased, and to the urgency of the demand, i.e. the effect of a higher price in checking purchases.. Here is a scarcity element of 333 per cent. added to the normal price as measured against British goods produced under freely competitive conditions. £75 worth of American oil is able to bloat itself out to the value of £100, and to require £100 worth of (ex hypothesi) freely produced British goods to go out in payment. It appears feasible primâ facie for Great Britain to impose an import duty up to 333 per cent. ad valorem on American oil, obliging the producer to pay the whole of it. Since a normal profit would be made upon every part of this supply entering the market at 6d., it seems as if the British

Government might take 2d. per gallon en route, leaving the oil to sell at 8d. as before, relieving the consuming public in its capacity as taxpayer at the expense of the foreigner. This, indeed, might possibly be done. It might not pay the Standard Oil Trust to endeavour to recoup itself for the payment of the tax by raising the price of oil; for the result of such a rise of price, by diminishing the sales on the one hand, and raising the marginal expenses of production through lessening the output on the other hand, might be a reduction of aggregate profit as compared with the profit derived from maintaining the selling price at 8d. But though the foreigner in this situation might pay all the tax, there is no certainty that he would do so. If the monopoly is of a necessary or a prime convenience, as is here the case, a slight rise of price is likely to cause a less than corresponding shrinkage of demand, so that it will generally pay the monopolist to sell a slightly smaller quantity at an enhanced price, the ad valorem duty on the enhanced price thus forming a reduced tax on the profit of each unit of the product. The only really scientific tax on a monopoly is one directly imposed, not on the selling price, but on the monopoly element in that price, or, what comes to the same thing, on the surplus profit of the business over the normal return on competitive capital. As I have argued elsewhere,1 "since we could not presume the monopoly rent to 1 The Economics of Distribution, p. 321. (Macmillan and Co.)

vary directly and proportionately with the selling price, an ad valorem tax upon selling prices might make it more profitable for a monopolist to restrict production and raise prices."

A really scientific tax upon such a monopoly can only be imposed by the government of the nation in which the income of the monopoly is earned; but it is possible that an import duty might be devised so as to take a large part of the surplus profit. This is a case where detailed consideration of concrete circumstances rightly determines a policy.

If it were tolerably certain that a rise in the price of oil to 9d. or 10d. would very greatly reduce the sale, and would probably bring other sources of supply or other illuminants into effective competition, it might be a sound fiscal policy to impose the tax. The delicacy, however, of calculating the reaction of a rise of price upon demand on the one hand, and cost of production on the other, would be so great, that taxation of this kind could not be regarded as "scientific," and must always remain speculative.

The case of a "monopoly" of this order is, however, one where it can fairly be argued that a tax will tend to fall in large part on the producer.1

§ 3. But, as Mill recognised, it is not necessary to assume "monopoly" in order to get the condition of

1 Mill, however, is not justified in asserting out of hand that "the price cannot be further raised to compensate the tax."

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scarcity value for a class of imports. A natural limit of supply may keep prices high, though there may be competing owners of the supply. The familiar instance is that of rare wines, which, though there may be several competing growers, will fetch a price embodying scarcity rent. An import duty on such wine will fall largely on the growers, or more strictly, on the owners of the vineyards. But even here we cannot speak with absolute assurance. The tax must fall wholly on the producers on condition that the market of the taxing country is their only market, and that they cannot raise their price within the taxing country without causing something like a proportionate shrinkage in their sales. Both these are practical considerations which would require to be taken into account if a new tax upon high-priced wines were proposed. A tax imposed by a country taking only a portion of the supply of a vintage wine would be met in part by a diversion of a larger portion of the supply to other markets, causing a rise of price in the short supply of the taxing country; if, however, the rarity of the wine were a considerable factor in its desirability, the rise of price might not appreciably check the demand, and so a slight shortage in our supply (accompanied by a slight increase of supply at lower price in other markets) might be attended by a rise of price which would compensate the producers for the tax.

Thus we see that, though an import duty tends to