Peichen Gong

Optimal stocking level and final harvest age with stochastic prices

Summary This paper presents an integrated strategy for thinning and final harvest decisions in even-aged stand management under conditions of uncertainty in future timber prices. The strategy consists of two parts: an optimal stocking level function that guides the choice of thinning intensity, and a reservation price function for determining the time of final harvest. Optimal stocking level is modelled as a function of stand age and stumpage price. The reservation price function is formulated using stand age and standing timber stock as independent variables. The coefficients of the two functions are optimised simultaneously for an example stand of Scots pine ( Pinus Sylvestris L.) in northern Sweden. The functions obtained are then used to simulate the thinning and final harvest decisions for the example stand. The integrated strategy is compared with a pure reservation price strategy where no thinning is allowed, and with the optimal management regime determined based on the expected timber prices.

Non-timber benefits, price uncertainty and optimal harvest of an even-aged stand

Abstract Non-timber benefits and timber price uncertainty are two factors that can significantly affect forestry decisions. This paper examines the joint effects of these two factors on the optimal time to harvest an even-aged stand. Assuming that non-timber benefits are a function of stand age and that timber prices at different time points are uncorrelated, we show that the optimal strategy is to harvest when the observed price is greater than an age-dependent reservation price. Non-timber benefits affect the opportunity cost and the expected benefit of delaying the harvest at each age and, therefore, may affect the optimal reservation price. Numerical results are presented for example stands of Scots pine, where non-timber benefits are proportional to the standing timber stock. The results show that incorporating the non-timber benefits into the reservation price model significantly increases the optimal reservation prices and the land expectation value. However, the effects are smaller than when price uncertainty is ignored in the decision model.

Multiple-use tradeoffs in Swedish mountain region forests

This study investigates the tradeoffs among different uses of forests in the Swedish mountain region, where several interest groups use the forests for different and conflicting objectives. The tradeoffs information can help the involved interest groups to reach a rational compromise on the management and utilization of the forests. A multiobjective linear programming model is formulated; the considered objectives include (1) maximization of timber yield, (2) maximization of lich production for reindeer grazing, (3) maximization of recreation value, and (4) maximization of deadwood production. A set of efficient solutions is then approximated using the noninferior set estimation (NISE) method. The results show that managing the forest to maximize the net present value of the timber production profits would greatly reduce the volume of deadwood, that choices between the net present value and deadwood are flexible when the desired lowest lichen production is close to its maximum, and that choices between lichen and deadwood production are flexible as well when the desired net present value is around 93 % of its maximum.

Review - Roger A. Sedjo (2003): Economics of Forestry

Summary Ashgate Publishing Limited, Gower House, Croft Road, Aldershot, Hants GU11 3HR, England ( www.ashgate.com ). 498 p. £ 100.00. ISBN 0-7546-2237-1 (hardback). Being one volume in the series of the International Library of Environmental Economics and Policy (T. Tietenberg and W. Morrison, gen. eds.), this book is a collection of some of the most significant journal essays in forest economics and forest policy. In compiling this volume, Roger Sedjo did a great service to the forest economics profession. This volume includes twenty-five essays originally published between 1849 and 1996 in a dozen journals, and one chapter from the Third Assessment Report of the International Panel on Climate Change (IPCC, 2001) which addresses the biological sequestration of carbon in terrestrial ecosystems. These are organized into four parts: the harvest rotation issue, timber supply, multiple-use and non-timber outputs, and global issues. An introduction essay to this volume, written by the editor, provides an overview of the major issues in forest resource management and discusses some the most important contributions to the forest economics literature. The eleven essays in the first part of the book provide a rather complete coverage of the most important contributions to the literature on optimal rotation age, which is a fundamental issue in forest management and forestry investment. Four of the essays (Faustmann 1849, Ohlin 1921, Bentley and Teeguarden 1965, and Samuelson 1976) address the basic formulation and interpretation of the optimal rotation model. Four essays (Lofgren 1985, Newman, Gilbert and Hyde 1985, Reed 1984, and Brazee and Mendelsohn 1988) extend the basic rotation model to examine the rotation age decision in the presence of deterministic trends and uncertainty in timber yield and price, respectively. Based on the Faustamnn rotation model, Klemperer (1976) and Chang (1982) examine the impacts of taxation on forest value and on the optimal rotation age. Koskela (1989) provides a detailed analysis of the impacts of taxation on timber harvest decisions under price uncertainty. What I feel missing in this part is a comparative statics analysis examining the impacts of changing economic parameters on the optimal rotation age. Part II includes five essays on economic analysis of long-run timber supply. Clawson (1979) reviews the historical development of forest resource and forest utilization in the United States. Vaux (1973) examines the long-run potential supply of timber from forest plantations in California. Berck (1979) investigates the difference in harvesting behavior between private forest owners and public managers. Lyon (1981) and Lyon and Sedjo (1983) examine the optimal exploitation of old-growth natural forests and the transition to steady state. While these essays all focus on the long-run timber supply in the United States, the methods developed and used in these papers could be applied for any other region. The exploitation of old-growth natural forests and the long-term availability of timber have been without doubt two major concerns in the United States. In many parts of the world, however, concerns about timber supply in the short-run have also had great influences on the development of forest policy. It would have been appreciated if a couple of essays addressing the short-run supply of timber had been included. Part III contains three essays dealing with the problem of multiple-use forest management. Gregory (1955) develops an economic framework for multiple-use management based joint production theory. Hartman (1976) examines the multiple-use rotation age decision. Swallow, Parks and Wear (1990) investigate the problem of non-convexities involved in multiple-use rotation age decisions. The merits of these essays lie in that they use rather simple models to demonstrate the importance of incorporating non-timber benefits in forestry decisions and the complexities of the multiple-use problem. In his 1976 essay, Hartman points out that in many situations management practices applied to one stand affect the value of non-timber outputs derived from the adjacent stands; such interdependence needs to be incorporated into multiple-use decision analysis. I certainly would like to find in this volume one or two essays examining the impacts of stand interdependence on the optimal decision. Another important issue in multiple-use management, which is not covered in this volume either, is the valuation of non-market priced outputs and services. Yet I believe that this omission is well motivated, for there are two separate volumes in this series devoted to non-market valuation methods (R. T. Carson, ed. Direct Environmental Valuation Methods , Volumes I and II). The seven essays in Part IV deal with a set of forest economic and policy issues related to global warming and biodiversity conservation. Parks and Hardie (1995) examine the cost-effective subsidies to convert marginal agricultural land to forests for the purpose of carbon sequestration. Hoen and Solberg (1993) analyze the potential and cost-effectiveness of increasing carbon sequestration in existing forests by changing forestry practices. van Kooten, Binkley and Delcourt (1995) examine the effect of carbon taxes and subsidies on the optimal rotation age. The chapter from the Third Assessment Report of IPCC (2001) provides a comprehensive review of the literature on the ecological, environmental, social and economic aspects of carbon sequestration in terrestrial ecosystems. While forests and forest management could play an important role in mitigating climate change, increasing level of atmospheric dioxide and climate change would inevitably affect the productivity of forest ecosystems, thereby could have significant impacts on future timber growth, harvest and inventory as well as carbon storage in forest ecosystems. Joyce et al. (1995) present a framework for analyzing the potential effects of climate change on the forest sector. The remaining two essays in this part examine the costs and benefits of biodiversity preservation, respectively. Montgomery, Brown and Adams (1994) estimate the marginal cost of preserving the northern spotted owl. Simpson, Sedjo and Reid (1996) examine the expected value of the marginal species as an input to pharmaceuticals. The editor points out in the introduction chapter that there are many other important contributions that are not included in this volume, some of these are mentioned, others not. In addition to the few omissions noted earlier, several important economic and policy issues such as uneven-aged stand management, deforestation, international trade, sustainable forestry, forest recreation, wildlife management and so on are not discussed. Moreover, none of the journal essays published since 1997 is selected. That there are many other important contributions does not mean the essays included in this volume are less important, however. While each forest economist may present a different list of the most important papers, most (if not all) of the essays in this volume would appear on anyones list. I strongly recommend this book for research scientists and graduate students of forest economics as an essential addition to their reference library.

Economic modeling in forestry : avoiding the Lucas critique

Timber supply is a primary object of economic modeling in forestry, especially in the context of policy evaluation. Policy changes have two potential effects on timber supply. First, they may change the relationship between the quantity of timber harvested and its determinants. Secondly, they may alter the values of the factors that influence timber supply. A standard approach for policy evaluation is to estimate the supply function from observed harvest behavior, and then use the obtained supply function to simulate the effects of policy changes. A limitation of this approach, known as the Lucas Critique in economics literature, is that it usually cannot capture the first effect of policy changes on timber supply. This paper presents a new approach to estimate the timber supply function by introducing two applications in counterfactual comparisons. The approach seeks to optimize the supply function parameters under a given set of policy conditions. In the first application, we determine the change in the supply function following a change of the market regime and measure the welfare gain from competition in the timber market. The second application examines the effects of tree improvements on the timber supply function and on the producer and consumer surplus. These two cases illustrate that our approach is capable of determining the change in the supply function coefficients induced by policy or technological changes. Results from the second application also show that ignoring the change in supply functions leads to significant underestimate of the welfare effects of biotechnological improvements in forestry.