derived demand, timber values, & rent chapters 3 and 10
TRANSCRIPT
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Derived Demand, Timber Values, & Rent
Chapters 3 and 10
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Input Markets
No direct demand for logs for the most part…
http://www.hellocotton.com/decorating-a-wall-with-slices-of-wood-logs-1251305
http://www.homedit.com/interesting-diy-outdoor-table-of-wood-logs/
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Derived Demand
The demand for inputs by firms is similar to demand for goods and services by consumers
Difference is that demand for forest products is usually derived from demand for other goods (housing, newspapers, magazines, furniture)
As such demand for lumber is based on the supply of lumber, along with other inputs, used in making the product
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Illustrating Derived Demand
Demand for housing
Demand for softwood lumber
Price homes
Price lumber
Quantity homes
Quantity lumber
Supply homes
Supply other inputs
Supply lumber
Shaded area here indicates a willingness to pay after deducting the cost of all the other inputs
This is then the demand curve for that input-in this case, lumber
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Example of Final and Input Markets
From Yanshu Li and Daowei Zhang. 2006. Incidence of the 1996 U.S.–Canada Softwood Lumber Agreement among Landowners, Loggers, and Lumber Manufacturers in the U.S. South. Forest Science.
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Timber Supply
Short-run
Long-run (conventional and very long-term)
SVLR
D
s
SL
R
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The Extensive Margin
Stands vary in terms of their Timber Value
Timber Supply is drawn from the Timber Inventory
The Timber Inventory is sensitive to values and costs
Total inventory
Economically recoverable inventory
Q
Net value ($/m3)
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Timber Supply
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P
MC
C
0
P=MR
P*
Q
Producer Surplus
Perfect Competition
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Profits, economic rent, and producer surplus
What is the difference between zero or normal profits, economic profits, and economic rent? In standard assumption of perfectly competitive markets,
all factors of production are freely available, and opportunity cost is market price of using them (wages, rental for capital)
Therefore there is no “profit” under standard assumptions of perfect competition-there are zero or “normal” profits
Under perfect competition (economic) profits are a sign of disequilibrium
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Economic Rent
Economic rent occurs when we modify our assumption of perfect competition
In resource economics there are two main ways in which it can appear
market imperfections (market power or distortions)
Or from inherent differences in the productivity/quality of a resource
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Economic Rent (2)
Economic rent is the difference between the price paid for the factor and its opportunity cost (its best alternative use)
The rule of thumb is to assign this “excess profit” to the factor that is scarce
Characteristic of resource economics Land for housing in
Vancouver Forests in BC Ore deposits
Economic rent is the return to a scarce input factor over and above the opportunity cost of bringing it into production.
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Profits or Rent?
Assume you have some more productive forest land so you can grow 10% more timber than anyone else
Does this mean that your costs are 10% lower? No, it is the quality of the land You could lease the land and enjoy the rents associated
with the higher payments because of the productivity
Therefore, these excess profits are assigned to the land and called scarcity rent or economic rent
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S
R
$
Q/t
Qs
Qd
p
q
S Consumer Surplus
R Economic Rent
Economic Rent
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P
MC
C
0
P=MR
P*
Q
Producer Surplus
Perfect Competition (?)
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$/m3
Volume Recovered m3
MC
C
0
MRR
V
Economic Rent
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$/m3
Volume Recovered m3
MC
C
0
MRP
V
Economic Rent
Why is it important?
Two main reasons:
First, rent measures a payment above and beyond that required to keep the factor in production we can collect that rent without changing the production decision (maintains efficiency)
Second, from the perspective of the Crown, this represents the return to the public (a distributional goal)
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$/m3
Volume Recovered m3
MC
C
0
MRP
V
Economic Rent collected by the government
Different Stumpage Methods Have Different Outcomes
Two types:
Lump Sum: One price to pay to access all the timber (could be appraisal or competitive bid)-in theory could bid up to the full amount and harvest at the optimal level, V
Fixed Charge: A payment on a per cubic metre basis (e.g. $X per m3). This can be determined administratively (through formulas) or you could bid it as well.
V’
Stumpage
Economic Rent retained
by the logger
Deadweight loss
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Utilization Standards
Why Do we Have Utilization Standards?
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P
Q
p*
q*
D
S
q1 q2
Consumer Surplus
Producer Surplus
Deadweight Loss as a measure of inefficiency
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The purpose of utilization standards
http://www.for.gov.bc.ca/BCTS/bulletins/Cruise_based_TSL_QA_Oct_2_09.pdf
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• Stumpage is a term used to describe the price paid for standing timber.
Our focus here is on using it to denote the price paid to the Crown.
Stumpage
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81/8
2
83/8
4d
85/8
6
87/8
8
89/9
0
91/9
2f
93/9
4
95/9
6h
97/9
8h
99/0
0
01/0
2
04/0
5
07/0
8
09/1
0$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
$2,000,000
Stumpage/Government Revenues in BC, 1981-2010, 000’s of Canadian dollars
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• Fixed Schedules
• Appraisals
• Competitive Auctions Speaker next Tuesday will speak to this
Alternative Stumpage Systems