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FNR 407 Forest
Economics
William L. (Bill) Hoover
Professor of Forestry
496-0077
743-4120 home, 404-7432 cell
[email protected]
Economics
• Allocation of scarce
resources to
unlimited wants
– Market
– Other, e.g.?
Quantity (Q)
Demand Curve
• Schedule of amounts
consumers are willing
and able to buy at
various prices
– Why is curve negatively
sloped
• Declining marginal utility
• Substitution effect
– Not same as consumption
P
P1
P2
Q1
Q2
Q
Marginality
• Given the function Y = f(X),
– Marginal change is change in Y per unit
change in X
– ∆Y/ ∆X, or
– dY/dX (first derivative of Y with respect to X
• Example
– Y ≡ yield, X ≡ year
– dY/dX = current annual increment
– Y/X = mean annual increment
Supply Curve
• Schedule of amounts
producers are willing
and able to supply at
various price levels
P
– Marginal cost curve
above average total cost
Q
Supply Curve
Price (P)
ATC
MC
P1
P2
Q 2 Q1
• Marginal cost (MC)
curve above average
total cost (ATC)
• Can’t cover all costs
in long-run with
price below ATC
Forest Economics
• For forests decision making complicated
by
– Joint production
– Externalities
– Non-marketed outputs
– Wide variety of “types” of owners
Joint Production
• Forest provides multiple “outputs”
– Wood
– Water
– Wildlife habitat
– Recreation, etc.
• How does a manager simultaneously
determine appropriate level of output of
each?
Externalities
• Positive - decision to do one thing
results in unintended but positive result
– e.g., attract new species of bird
Purple
Gallinule
Externalities
• Negative - decision to do one thing
results in unintended but negative result
– displace indigenous species of bird
Indigo
Bunting
Types or Owners
• Issue is mix of types of
owners in an ecosystem
– Public
•
•
•
•
Federal
State
County
Local
– Private
• Industrial
• Non-industrial
– Investor
– Farmer
– NGO (non-governmental
organization), e.g. land trust
Context In Which Decisions
Are Made Matters!
• What is affect of
type of owner?
– Public agency
– Industrial firm
– Private nonindustrial (NIPF)
Public
Agencies
• Management objectives set by large
number and variety of interest groups
• Conflicts among interest groups difficult
to resolve
• Political pressures may dictate budget
and land use decisions
Industrial
Firms
• Profit motivated
• Forest practices constrained by AF&PA
Sustainable Forestry Program, public
pressure, and regulations
• Most productive forest land
• Forest land is security for conversion
facilities
NIPF
• Largest class of forest
owner
• Highly variable motives for
owning land
• Management of any type
may be low priority
• Aesthetics and wildlife
frequently a high priority
Perspective Matters
• Should managers
base decisions on ?
– each individual tree
in a stand,
– the stand as a
whole, or
– the whole forest
(multiple stands)
– the ecosystem
Perspective Matters
• Decisions
based on a
single tree
– Diameter limit
– Crop tree
selection
– Financial
maturity of
crop trees
Perspective Matters
• Decisions based
on a stand
– Even-aged
• Optimal rotation
length
– Uneven-aged
• Single tree
selection
Two-age shelterwood
Perspective Matters
• Decisions
based on
multiple stands
– Unregulated
• Irregular
harvest
– Regulated
• Regular
harvest
Even-aged Hardwood Stands on
Daniel Boone National Forest
Perspective Matters
• Decisions
based on
ecosystems
– Multiple
objectives
– Must
manage
across property lines
Forested ridges in Central PA
are important watersheds
Economic Characteristics of
Forests and Timber
– Immobility of trees
• Location utility
– Inventory vs. economic
supply
– Long production period
– Dual nature of trees
• Capital (factory &
machinery)
• Product
Immobility of Trees
• Location Utility
– Forests have value in part based on their
location
– Trees have in-place value as part of a forest
– Conversion value requires harvesting and
transportation of cut products
Inventory vs. Economic
Supply
• Inventory is total
physical volume
present
– US Forest Service
Forest Survey
• Estimate of total
volume
Inventory vs. Economic
Supply
• Economic supply is
amount of timber owners
are willing to sell at some
price over a specified
time period
– Can’t measure directly
• Deduced from observed
market equilibrium points
Long Production Period
PAI as % of Stocking
• High ratio of
inventory to
output
7
6
Percent
– Inventory of 3
to 6 MBF per
acre for 100 500 bd.ft. per
acre per year
– 3% ratio
8
5
4
3
2
1
0
0
20
40
60
Years
80
100
Economic Characteristics of
Forests and Timber
– Production function
is a biological
growth process
• Highest cost input is
time, an opportunity
cost
– Opportunity to sell
now instead of later
Production Function
• Relationship
between
inputs (age)
and outputs
(volume)
Input (age)
Inflection
point
Biological
maturity
Production Function
Cubic Feet
Volume Longleaf Pine, SI 80, Natural
Stand (Schumacher & Coile, 1960)
1000
900
800
700
600
500
400
300
200
100
0
0
20
40
60
Age
80
100
Dual nature of trees
• Level of capital
investment – size of factory, and
– number and capacity
of machines
• Acres of forest
– stand density
Dual nature of trees
• Rate at which
machines are
operated
– Speed and hours per
week
• Rotation length
– Increasing length
increases capital
investment in
“machinery”