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

Peichen Gong () and Löfgren, Karl-Gustaf ()
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Peichen Gong: Department of Forest Economics, Swedish University of Agricultural Sciences, SE 901 83 Umeå, Sweden
Löfgren, Karl-Gustaf: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden

No 664, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: 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.

Keywords: Rotation age; reservation price; price uncertainty; timber supply; timber market. (search for similar items in EconPapers)
JEL-codes: D21 Q11 Q12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-env
Date: 2005-09-29
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Published in Journal of Forest Economics, 2007, pages 217-243.

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Persistent link: http://EconPapers.repec.org/RePEc:hhs:umnees:0664

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