U.S. Policy and Canadian Lumber:Effects of the 1986 Memorandum.of Understanding

of the import market share with respect to the> tax rate, first tktine the marketclearing condition for the lJ.S. domestic luntl~~ market \yit h an esport tits on

Canada’s lumber:

ncp, = .Ycp, t s’((1 (@, (1)

Where II is the demand for lumber, 3 is Canadian lurnbc>r supply, and S” is ailother lumber supply (almost exclusively domestic). Next, dcfiric: the c,l;isticity oflumht~r price with respect to the tax rate (Pi,,, ) by taking the total dcri\ativcb ofEquation (1) and rrarranging tcrnis:

Where elasticities of the form rY,,, 21-c own-prict, elasticities \vith rcspc~ct to thclref(>renced quantity (I’). Note that because P,~,~ .:. 0, P,~,~ and vsrs,,, ’ 0. mtl 0 -

(Y KC 1 . f’p,o is unambiguously positive. That is. print’ will ;tlw;tys incrcas(~ with 311increase in the tax rate. IJsing the formula for cP,,, allows the el;isticity of Canadi;3nshare to he similarly dcrivcd from the derivative of m’ - s’((1 tu~p)!Zl(p):

Thc elasticity of share with respc’ct to the price, of stump;tgc is sirnila-ly d(krivctffrom the equilibrium condition

where w is the price of st ump;lgc and the other variables at-cl 2s detincd nbovc~.The increase in factor cost also h;ts the effect of shifting the supply curvt‘ inwardand the elasticity of lurnher price w.r. t stumpage price is:

‘The share elasticity is therefore

p ,k 14’ :z (2.i”, ,“ + (C’.Y ,/I “/Lp)~p, I<’ (6)

The sign of c~),~~, is positive while the sign of o,,l. 11 , is ambiguous. Using the tbsticityevidence from Adams et al. and 1987 observations on market quantities, KY’

NO\~b \ll?l- Ii l!I!XP 80:~

( 1 1 )

(12)

(17)

DA’I’A

I:S’I‘IMA’I‘ION RESIJL’I‘S

MARKET IMPACTS

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N0\‘k:~11!1‘1~ 19!f3 81 1

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