Question

The United States has recently imposed tariffs on the importation of Canadian lumber; the tariffs range from 17.41-30.88 percent. Canadian exports to the U.S. make up about 30% of all softwood lumber used in U.S. residential housing construction. Using this information, do the following:

A. Assume the U.S. equilibrium price of lumber with no international trade is $380 per 110,000 feet of lumber and the world price of lumber is $360 per 110,000 feet of lumber. Explain the effects of the tariff on the supply and demand for lumber in the United States. In your answer, please explain what will happen to the equilibrium price and quantity of lumber sold in the United States because of the tariff. Illustrate your answer with a graph of the supply and demand for lumber.

B. Discuss who benefits and who pays the costs of the tariff. Is the tariff economically efficient? Please explain and illustrate your answer with a graph. (In your answer, remember to define “efficient”.)

Answer 1

Answer to part A

Here, initially the world price i.e. $360 is lower than the domestic price of lumber in the US i.e. $380. In this scenario, it is obvious that some of the lumber would be imported by the Americans from Canada. However, after the tarrif is imposed (17.41-30.88 percent), the price of the imported lumber would rise to $422.7 to $471 depending on the exact tarrif percentages imposed. In any case, the tarrif would raise the price well above the current equilibrium price i.e. $380. Hence, the new world supply curve after tarrif, i.e. S1 and S2 would be ineffective as people would opt for cheaper domestic lumber. Hence, the supply and demand for lumber in the US would remain unaffected and the price and the quantity sold would also remain intact.

Answer to part B

Even, if some of the importers still import lumber from Canada, the importers would be the payers for the tarrif and the American government would be the beneficiary of the tarrif as it is collected by the importing government. The tarrif would not be efficient becasue it would distort the existing equilibrium market price and would make the imports very expensive in the American Market.