The government proposes to increase the sales taxes by 1%. Each business in the supply chain would charge the tax and add it to the cost of their services (value added). Consumers, who have to pay more taxes, would have less disposable income to spend on new houses. The forestry companies are also going to incur more expense because this sales tax is not rebated back to producers when they buy inputs to harvest and process trees into lumber.

Use an appropriate model to illustrate and explain the impact of this sales tax increase on the price of new houses and the prices received by lumber producers.