An example of a product price rising less than an increase in a tax

See U.S.-Canada spat raises building costs from The Houston Chronicle.

"As a wave of pent-up home-buying emerges across the U.S., a pesky and oft-forgotten trade dispute with Canada is boosting building costs.

A long-simmering spat between the U.S. and Canada over softwood lumber is adding to the expenses homebuilders face in the fallout from disruptions related to the coronavirus pandemic, said David Logan of National Association of Home Builders. Lumber mills in the Pacific Northwest cut production amid lockdowns, and builders are buying more wood from Canada, he said.

Canadian producers are paying average tariffs of more than 20 percent on timber shipments to the U.S., and that translates into an average price increase of about 8 percent in the U.S., Logan said. Construction is topping forecasts, and builders will be forced to absorb the additional expenses. Framing lumber accounts for as much as a fifth of the material costs of erecting a home.

“The majority of homebuilders in America are truly small businesses, building fewer than 10 homes a year,” Logan said in a telephone interview. “So the effects that the pandemic has had on the economy make it a lot more difficult for builders to absorb those costs.”

The Trump administration slapped punitive tariffs on Canadian softwood lumber in 2017, saying the industry is unfairly subsidized."

Below is something that I do in class that explains why price does not rise as much as the tax.

Here we will look at an excise tax or a per unit tax. Every time a unit of a good is sold, the seller must give the government a flat amount, like $1 (not a percentage). If the government enacts an excise tax, the supply curve must shift up by the amount of the tax.

In the graph below, suppose that an excise tax of $1 is enacted. There is a new supply curve. Every point on the new supply line is exactly $1 above the old supply line.

Notice that every point on S₂ is exactly $1 above S₁. This because the firms in this market now need $1 more dollar for each quantity supplied. Before the tax was enacted, the market needed $1 to supply 1 unit. But now, because of the tax, they need an extra dollar or $2 to supply 1 unit.

The price has gone from $5.50 to $6.00. This means that buyers must pay 50 cents more (or $.50 more). So they are paying $.50 of the $1.00 excise tax. That means that the seller also pays $.50 of the $1.00 excise tax.

When you buy the product, you give the seller $6.00. But they must give $1.00 to the government. Before the tax, you gave the seller $5.50. So now they get $.50 less.

In this case, buyers and sellers evenly split the cost of the tax. But if the slopes of the supply and demand curves were different, the buyers or sellers could pay more than half the tax.