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Market and welfare implications of the reservation price strategy for forest harvest decisions

Listed author(s):
  • Gong, Peichen


    (Department of Forest Economics, Swedish University of Agricultural Sciences, SE 901 83 Umeå, Sweden)

  • Löfgren, Karl-Gustaf


    (Department of Economics, Umeå University)

Registered author(s):

    Previous 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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    Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 664.

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    Length: 30 pages
    Date of creation: 29 Sep 2005
    Publication status: Published in Journal of Forest Economics, 2007, pages 217-243.
    Handle: RePEc:hhs:umnees:0664
    Contact details of provider: Postal:
    Department of Economics, Umeå University, S-901 87 Umeå, Sweden

    Phone: 090 - 786 61 42
    Fax: 090 - 77 23 02
    Web page:

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    1. Clarke, Harry R. & Reed, William J., 1989. "The tree-cutting problem in a stochastic environment : The case of age-dependent growth," Journal of Economic Dynamics and Control, Elsevier, vol. 13(4), pages 569-595, October.
    2. Thomas A. Thomson, 1992. "Optimal Forest Rotation When Stumpage Prices Follow a Diffusion Process," Land Economics, University of Wisconsin Press, vol. 68(3), pages 329-342.
    3. Bruce McGough & Andrew J. Plantinga & Bill Provencher, 2004. "The Dynamic Behavior of Efficient Timber Prices," Land Economics, University of Wisconsin Press, vol. 80(1), pages 95-108.
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