Derived Demand, Timber Values, & Rent

Transcription

1 Derived Demand, Timber Values, & Rent Chapters 3 and 10 January 14, 2014

2 Input Markets No direct demand for logs for the most part decorating-a-wall-with-slices-of-wood-logs

3 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

4 Illustrating Derived Demand Supply homes Price homes Shaded area here indicates a willingness to pay after deducting the cost of all the other inputs Supply other inputs Demand for housing Quantity homes Price lumber Supply lumber This is then the demand curve for that input-in this case, lumber Demand for softwood lumber Quantity lumber

5 Example of Final and Input Markets From Yanshu Li and Daowei Zhang Incidence of the 1996 U.S. Canada Softwood Lumber Agreement among Landowners, Loggers, and Lumber Manufacturers in the U.S. South. Forest Science.

6 Timber Supply s Short-run S LR Long-run (conventional and very longterm) D

7 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 Net value ($/m3 ) Economically recoverable inventory Q Total inventory

8 Timber Supply R E P O R T F O U R T H S E S S I O N T H I R T Y - N I N T H P A R L I A M E N T Growing Fibre, Growing Value Special Committee on Timber Supply AUGUST 2012

9 P Perfect Competition Producer Surplus MC P* P=MR C 0 Q

10 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

11 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

12 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.

13 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

14 Economic Rent $ Qs p S S Consumer Surplus R Economic Rent R Qd q Q/t

15 P Perfect Competition (?) Producer Surplus MC P* P=MR C 0 Q

16 $/m3 Economic Rent MC R MR C 0 V Volume Recovered m3

17 Why is it important? $/m3 P C Economic Rent MC MR 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) 0 V Volume Recovered m3

18 Different Stumpage Methods Have Different Outcomes $/m3 P C 0 Economic Rent collected by the government Economic Rent retained by the logger V V MC MR Stumpage Deadweight loss 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. Volume Recovered m3

19 Utilization Standards Why Do we Have Utilization Standards?

20 Deadweight Loss as a measure of inefficiency P S Consumer Surplus p* Producer Surplus D q1 q* q2 Q

21 The purpose of utilization standards BCTS/bulletins/Cruise_base d_tsl_qa_oct_2_09.pdf

22 Stumpage 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.

23 81/82 82/83d 83/84d 84/85 85/86 86/87 87/88 88/89 89/90 90/91e 91/92f 92/93 93/94 94/95h 95/96h 96/97h 97/98h 98/99 99/00 00/01 01/02 02/03 04/05 06/07 07/08 08/09 09/10 Stumpage/Government Revenues in BC, , 000 s of Canadian dollars $2,000,000 $1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0

24 Alternative Stumpage Systems Fixed Schedules Appraisals Competitive Auctions Speaker next Thursday will speak to this