Market and welfare implications of the reservation price strategy for forest harvest decisions
AbstractPrevious studies have reported significant gains from adaptive harvest strategies when future timber prices are uncertain. For the final harvest decision in even-aged stand management, the adaptive strategy typically means that a stand is harvested only when the timber price is high, whereas low prices are avoided by postponing the harvest. Such a harvest behavior may have significant impacts on the future timber price process, which in turn affects the landowner’s profits. Moreover, it would certainly affect the timber-based industry and consumers. This paper assesses these impacts in a hypothetical timber market, using the Faustmann rule as a benchmark. The results show that changing from the Faustmann rule to the reservation price strategy (RPS) reduces the harvest and thereby pushes up the price level. The RPS significantly reduces the short-run price variations. In the long-run, both the mean and the variance of the timber price tend to stabilize: Depending on the anticipated price variations underlying the RPS, the expected timber price may be close to, or much higher than, the benchmark level, and the variance of price can be very large or very small. The welfare effect of RPS is small. While the RSP increases the landowners’ profits, it reduces the consumer surplus by approximately the same amount.
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Bibliographic InfoPaper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 664.
Length: 30 pages
Date of creation: 29 Sep 2005
Date of revision:
Publication status: Published in Journal of Forest Economics, 2007, pages 217-243.
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Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
Phone: 090 - 786 61 42
Fax: 090 - 77 23 02
Web page: http://www.econ.umu.se/
More information through EDIRC
Rotation age; reservation price; price uncertainty; timber supply; timber market.;
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
- Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
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