1. Derived Demand, Timber Values, & Rent Chapters 3 and 10

2. 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/

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 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

5. 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.

6. Timber Supply  Short-run  Long-run (conventional and very long- term) D s S LR

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

8. Timber Supply

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

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

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

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

17. $/m3 Volume Recovered m3 MC C 0 MR P 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)

18. $/m3 Volume Recovered m3 MC C 0 MR P 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

19. Utilization Standards  Why Do we Have Utilization Standards?

20. P Q p* q* D S q1q1 q2q2 Consumer Surplus Producer Surplus Deadweight Loss as a measure of inefficiency

21. The purpose of utilization standards http://www.for.gov.bc.ca/ BCTS/bulletins/Cruise_base d_TSL_QA_Oct_2_09.pdf

22. 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

23. Stumpage/Government Revenues in BC, 1981-2010, 000’s of Canadian dollars

24. Fixed Schedules Appraisals Competitive Auctions  Speaker next Tuesday will speak to this Alternative Stumpage Systems