Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 4

Canada's forestry industry (composed mainly of those involved in the lumber industry) directly employs about 370,000 workers and indirectly employs an additional 510,000 people in support services. Forestry products account for nearly 3 percent of Canada's gross domestic product (GDP) and 14.1 percent of its exports. Lobbyists for the U.S. lumber and timber producers recently filed a complaint with the U.S. International Trade Commission (ITC) and the U.S. Department of Commerce (DOC) alleging that the Canadian government provided a subsidy to its lumber producers and caused harm to U.S. lumber and timber producers. As a result of these concerns, one U.S. lobbyist proposed the imposition of a 15 percent excise tariff on all Canadian forestry-products. Determine the likely impact of the proposed 15 percent excise tariff on the equilibrium price and quantity of lumber exchanged in the U.S. Would domestic consumers and producers benefit from the proposed tariff? Explain carefully.