NEOCLASSICAL ECONOMICS FOREST ECONOMICS. Don Hodges University of Tennessee, USA University of Ljubljana, Slovenia

Transcription

1 NEOCLASSICAL ECONOMICS FOREST ECONOMICS Don Hodges University of Tennessee, USA University of Ljubljana, Slovenia

2 ECONOMICS NEOCLASSICAL ECONOMICS FOREST ECONOMICS ENVIRONMENTAL ECONOMICS ECOLOGICAL ECONOMICS INSTITUTIONAL ECONOMICS

3 FORESTER PERSPECTIVES Landowners are not managing appropriately Who will tell owners what and when to cut? We tell them their management goals

4 WHAT IS (NEOCLASSICAL) ECONOMICS? WHEN DID IT ORIGINATE? WHAT ARE CENTRAL CONCEPTS?

5 NEOCLASSICAL ECONOMICS Definition of Economics Economics is the study of how people and society choose, with or without money, to employ scarce productive resources that could have alternative uses to produce commodities and distribute them for consumption, Samuelson 1980

6 NEOCLASSICAL ECONOMICS History and Central Concepts Thorstein Veblen (1900) - the first to attach the label neoclassical Linked to marginal analysis - J.H.von Thunen ( ), Antoine Cournot ( ) and H.H.Gossen ( ) Often attributed to Jevons, Marshall, Menger, and Walras Strong tendency to abstraction and a reliance on deductive reasoning Application of mathematical techniques Emphasis on the individual rational utility maximizer Making choices at the margin, usually in competitive markets; which are characterized by market clearing and equilibrium outcomes. Firms are maximizers, subject to constraints imposed by production functions

7 SUPPLY THE SUPPLY OF GOODS TYPICALLY IS THE RESULT OF PRODUCTION BY FIRMS - Firms maximize profits FIRMS ALSO DEMAND RAW MATERIALS FROM SUPPLIERS - Stumpage for lumber, paper, etc. - Firms takes inputs to produce outputs (production function) UNLESS THERE IS MARKET FAILURE FIRMS WILL PROVIDE THE RIGHT AMOUNTS OF WHAT CONSUMERS (in aggregate) DEMAND - The right incentives are provided by profit maximizing behavior

8 PRODUCTION FUNCTIONS THE ABILITY OF FIRMS TO TAKE VARIOUS INPUTS AND UTILIZE THEM TO PRODUCE OUTPUTS (PRODUCTS) IS DICTATED BY THE PRODUCTION FUNCTION q = ƒ(x) q = ƒ(x 1, x 2, x 3,.,x n ) q = ƒ(x) (q 1, q 2, q 3,.,q m ) = ƒ(x 1, x 2, x 3,.,x n ) PRODUCTION FUNCTIONS DESCRIBE THE RELATIONSHIP BETWEEN INPUTS AND OUTPUTS. THEY SET THE BOUNDARY BETWEEN WHAT IS FEASIBLE AND INFEASIBLE INPUTS ARE CONSIDERED COSTS TO THE FIRM WHILE OUTPUTS GENERATE REVENUES -The firm s goal is to maximize the difference between the two

9 TYPES OF INPUTS FIXED FACTOR INPUTS (COSTS) - Costs that do not change with the output level or the price of the input (e.g., rent, land) VARIABLE FACTOR INPUTS (COSTS) Costs that change with the output level or price of inputs SHORT RUN includes fixed costs LONG RUN all input costs are variable

10 ESTIMATING THE OPTIMAL PRODUCTION LEVEL $ Total Cost Total Variable Cost Fixed Cost Output

11 ESTIMATING THE OPTIMAL PRODUCTION LEVEL $ ATC AVC AFC Output

12 ESTIMATING THE OPTIMAL PRODUCTION LEVEL $ MC ATC AVC AFC Output

13 ESTIMATING THE OPTIMAL PRODUCTION LEVEL $ MC ATC Marginal Revenue = Average Revenue = Price AVC AFC Output

14 ESTIMATING THE OPTIMAL PRODUCTION LEVEL $ MC ATC Marginal Revenue = Average Revenue = Price AVC AFC Output

15 AGGREGATE SUPPLY THE FIRM S SUPPLY CURVE IS REPRESENTED BY MARGINAL COST CURVE ABOVE AVERAGE FIXED COST AGGREGATE (MARKET) SUPPLY CURVE IS DETERMINED BY SUMMING SUPPLY CURVES OF ALL FIRMS IN THE SAME MARKET

16 SUPPLY ELASTICITY DEFINITION PERCENT CHANGE IN THE QUANTITY SUPPLIED RESULTING FROM A SPECIFIED CHANGE (USUALLY 1 PERCENT) IN THE VALUE OF ONE OF THE SUPPLY FACTORS TYPICALLY, FACTOR BEING CHANGED Is SPECIFIED E.G., PRICE ELASTICTY OF SUPPLY

17 DEMAND DEFINITION FUNCTIONAL RELATIONSHIP BETWEEN THE QUANTITIES OF A COMMODITY OR SERVICE THAT BUYERS ARE WILLING TO PURCHASE AT VARIOUS PRICES DURING A SPECIFIED TIME. CONSUMPTION: QUANTITY CONSUMED AT A GIVEN PRICE ASSUMPTION IS THAT CONSUMERS ARE RATIONAL AND WILL MAKE CONSUMPTION DECISIONS TO MAXIMIZE THEIR SATISFACTION (UTILITY), AND HAVE PERFECT KNOWLEDGE

18 INDIVIDUAL AND AGGREGATE DEMAND CURVES P P P D 2 + = D A D 1 Q Q Q INDIVIDUAL 1 INDIVIDUAL 2 AGGREGATE

19 MOVING TOWARD EQUILIBRIUM SURPLUS S S P 1 P 2 D SHORTAGE D Q d Q s Q s Q d RESPONSE TO A SURPLUS RESPONSE TO A SHORTAGE

20 KEYS TO NEOCLASSICAL ECONOMICS 1. Focuses on allocation of resources at a given moment in time. From: Colander (2000)

21 KEYS TO NEOCLASSICAL ECONOMICS 1. Focuses on allocation of resources at a given moment in time. 2. Accepts utilitarianism as playing a central role From: Colander (2000)

22 KEYS TO NEOCLASSICAL ECONOMICS 1. Focuses on allocation of resources at a given moment in time. 2. Accepts utilitarianism as playing a central role 3. Focuses on marginal tradeoffs. Neoclassical economics came into existence as calculus spread to economics, and its initial work was centered around the marginal tradeoffs that calculus focused on. From: Colander (2000)

23 KEYS TO NEOCLASSICAL ECONOMICS 1. Focuses on allocation of resources at a given moment in time. 2. Accepts utilitarianism as playing a central role 3. Focuses on marginal tradeoffs. 4. Assumes farsighted rationality. In order to structure the economic problem within a constrained maximization framework, one has to specify rationality in a way consistent with constrained optimization. Specific rationality assumptions quickly became central to the neoclassical approach. From: Colander (2000)

24 KEYS TO NEOCLASSICAL ECONOMICS 1. Focuses on allocation of resources at a given moment in time. 2. Accepts utilitarianism as playing a central role 3. Focuses on marginal tradeoffs. 4. Assumes farsighted rationality. 5. Accepts methodological individualism. Someone must be doing the maximizing, and in neoclassical economics it was the individual. One starts with individual rationality, and the market translates that individual rationality into social rationality. From: Colander (2000)

25 KEYS TO NEOCLASSICAL ECONOMICS 1. Focuses on allocation of resources at a given moment in time. 2. Accepts utilitarianism as playing a central role 3. Focuses on marginal tradeoffs. 4. Assumes farsighted rationality. 5. Accepts methodological individualism. 6. Structured around a general equilibrium conception of the economy. in order to make neoclassical economics more than an applied policy approach to problems(something Schumpeter wanted to do) one needs a general unique equilibrium conception of the economy. Formal welfare economics is based on this general equilibrium conception. From: Colander (2000)

26 REQUIRED CONDITIONS FOR A FREE MARKET FIRMS AND CONSUMERS ARE MAXIMIZERS PERFECT COMPETITION PERFECT INFORMATION NO UNPRICED GOODS NO UNPRICED EXTERNALITIES

27 PERFECT COMPETITION NO PRODUCER IS LARGE ENOUGH TO AFFECT PRICE Does not control a large enough share of market Price taker Classic example - agricultural commodities NO CONSUMER IS LARGE ENOUGH TO AFFECT PRICE Does not control a large enough share of market Price taker More common

28 IMPERFECT INFORMATION CONSUMERS PRODUCT INFORMATION PRICES PRODUCERS PRODUCTION PROCESSES RESOURCES PRICES

29 UNPRICED GOODS PUBLIC GOODS goods or services that are non-exclusive and non-rival OPTION DEMAND WTP for the option to use some resource in the future EXISTENCE DEMAND - WTP for the assurance that something remains in existence BEQUEST VALUE - satisfaction received from leaving resources to future generations

30 EXTERNALITIES NEGATIVE EXTERNALITIES external cost to producer because they do not bear the cost --- therefore, no market incentive for firm to eliminate or reduce P Social marginal cost Private marginal cost = C (cost of externality) Marginal revenue = price Q S Q P Q

31 EXTERNALITIES POSITIVE EXTERNALITIES outputs occur as an unmarketed by-product of producing marketed goods --- therefore, no market incentive for firm to produce P Private marginal cost Social marginal revenue = unpriced benefit Private marginal revenue Q P Qs Q

32 EXTENSIONS TO FOREST ECONOMICS q Maximum TP TP = q = ƒ(x) MP & AP Maximum MP Maximum AP x AP = q/x = TP/x MP = q/ x = dq/dx x

33 EXTENSIONS TO FOREST ECONOMICS m 3 Total Volume x CAI MAI x

34 EXTENSIONS TO FOREST ECONOMICS FAUSTMANN 1849 FOUNDATION OF TRADITIONAL FOREST ECONOMICS DETERMINES THE OPTIMAL MANAGEMENT FOR A FOREST STAND BASED ON ECONOMIC CRITERION MARKET VALUE SHORTER THAN MAXIMIZING BIOLOGICAL PRODUCTION CALCULATES THE VALUE OF AN INFINITE SERIES OF IDENTICAL ROTATIONS WHY NOT A SINGLE MANAGEMENT PERIOD? IGNORES LAND RENT/OPPORTUNITY COSTS FOCUSED ON MARKET VALUES (AT LEAST INITIALLY) STILL USED INVESTMENT ANALYSIS

35 BASIC FAUSTMANN FORMULA PV F = (p w v(t) g)e -rt where p w = timber price v(t) = timber growth function g = regeneration cost r = discount rate

36 EXTENSIONS TO FOREST ECONOMICS HARTMAN 1976 EXTENDED TO NON-TIMBER BENEFITS EXAMPLE WAS RECREATIONAL SERVICES BUT DEFINED BROADLY incorporates the possible flood control value, the food value of a young forest to game animals, and the increasing recreational opportunities as the trees grow older RESULT ROTATION INCREASES OVER SIMPLE FAUSTMANN CALCULATIONS HAS BEEN APPLIED TO A NUMBER OF NON-MARKET VALUES old-growth forests, endangered species, ecosystem services

37 IS NEOCLASSICAL/FOREST ECONOMICS USEFUL? MOST EFFECTIVE WITH TRADITIONAL PRODUCTION DECISIONS TIMBERLAND INVESTMENT INDUSTRIAL LAND MANAGEMENT WOOD PROCESSING PROBLEMS? STILL DIFFICULT TO CAPTURE NON-MARKET VALUES WITH STRICT NEOCLASSICAL APPROACH EXTERNALITIES UNCERTAINTY TIME

38 IS NEOCLASSICAL/FOREST ECONOMICS USEFUL? LANDOWNERS PRODUCERS OR CONSUMERS? BINKLEY (1980) LANDOWNERS AS UTILITY MAXIMIZERS (CONSUMERS) U = ƒ(forest income, non-timber utility) IMPLICATIONS prices are not always significant motivators

39 Respondent Ownership Objectives 1 = Not important; 5 = Extremely important

40 IS NEOCLASSICAL/FOREST ECONOMICS USEFUL? LANDOWNERS PRODUCERS OR CONSUMERS? BINKLEY (1980) LANDOWNERS AS UTILITY MAXIMIZERS (CONSUMERS) U = ƒ(forest income, non-timber utility) IMPLICATIONS prices are not significant motivators inelastic response to price changes

41 REPORTED SUPPLY ELASTICITIES SOUTHERN U.S. SOFTWOOD (Adams and Haynes 1980) PRICE INVENTORY FOREST INDUSTRY NIPF SOUTHERN U.S. HARDWOOD (Nagubadi and Munn 1999) PULPWOOD * 1.87 SAWTIMBER * 1.65 * NOT SIGNIFICANT

42 IS NEOCLASSICAL/FOREST ECONOMICS USEFUL? LANDOWNERS PRODUCERS OR CONSUMERS? BINKLEY (1980) LANDOWNERS AS UTILITY MAXIMIZERS (CONSUMERS) U = ƒ(forest income, non-timber utility) IMPLICATIONS prices are not significant motivators inelastic response to price changes policy development

43 IS NEOCLASSICAL/FOREST ECONOMICS USEFUL? Policy Development Avoiding Timber Shortages Providing Subsidies for Forest Establishment Technical Assistance for Timber Production Most Popular Policies wildlife habitat management

44 IS NEOCLASSICAL/FOREST ECONOMICS USEFUL? LANDOWNERS PRODUCERS OR CONSUMERS? BINKLEY (1980) LANDOWNERS AS UTILITY MAXIMIZERS PERFECT COMPETITION? OLIGOPOLISTIC COMPETITION (few buyers) FOR WOOD PERFECT INFORMATION? WOOD PRICES MANAGEMENT OPPORTUNITIES NON-TIMBER FOREST PRODUCTS ECOSYSTEM SERVICES

45 Applied ecosystem services in working forests: A direct market valuation Stuart Hale

46 Research Objectives Compare calculated values of selected ecosystem services management scheme to traditional management scheme Anchor to actual landscape as a case study Values are based on revenues that the owner could receive for providing goods and services

47 Project Area Proposed Project Area is approximately 1609 hectares Mixed mesophytic forest ecoregion of upland hardwoods with some cove hardwood forest types Current and past land uses included timber, coal, and natural gas extraction, human habitation, and agriculture

48 Management schemes Traditional management scheme: 1. Fiber 2. Recreation leases Ecosystem management scheme: 1. Fiber 2. Recreation leases 3. Watershed services 4. Carbon sequestration 5. Biodiversity

49 Methods Identify traditional and ecosystem services markets Examples: Local fiber markets Local recreational hunt leasing Ecosystem Marketplace The Nature Conservancy Mitigation banks/ ILF programs Over the Counter (OTC) Find comparable prices from reported transactions or estimates

50 Methods Landscape features with potential to offer marketable ecosystem services: 1. Areas suitable for fiber harvests 2. Culturally significant sites 3. Retention areas of recent timber harvest 4. Areas unlikely for timber harvest 5. Perennial streams 6. Critical habitat 7. Non-forest areas 8. Wetlands 9. High Conservation Value Forests 10. Critical viewsheds 11. Areas with public safety concerns

51 Price estimates Ecosystem Management Scheme Service Prices Service Unit Price per unit Sources Assumptions Fiber MBF $100 pessimistic $125 most likely $150 optimistic Recreation acre $2.00 pessimistic $2.07 most likely $3.00 optimistic Local prices Timber Mart- South 2 nd Quarter 2010 Local prices VA DOF 3000 BF/ac Harvest 80% for suitable areas Harvest 50% for SMZ buffers Annual harvest rate of total area/15-year ownership period All areas suitable are leased annually based on current conditions Carbon ton $0.10 pessimistic $1.00 most likely $ optimistic Ecosystem Marketplace Appalachian Carbon Partnership 127 tons/ac Annual enrollment rate of total area/15-year ownership period Additional area from fiber retention in Year 2

52 Price estimates Ecosystem Management Scheme Prices (continued) Service Unit Price per unit Sources Assumptions Watershed linear feet $20 pessimistic $25 most likely $30 optimistic Approximate ILF average construction cost Approximately 10% of ILF prices 1% of total LFt sold annually for 15-year ownership period Act as mitigation bank Demand provided through mitigation markets (CWA) Biodiversity acre $0.00 for all pricing scenarios Transactions are taking place but prices are highly variable and project specific No local transactions Act as conservation bank Demand provided by conservation markets (ESA)

53 Results Traditional Management Scheme Service Fiber 2873 (80% BA harvest) Area (ac) 410 (50% BA harvest) 3283 Recreation 3883 NA* Non-timber TOTAL: 3976 *The area of recreation is considered co-use, in that it provides multiple services, and therefore will only be counted once in total area.

54 Results Ecosystem Services Management Scheme Service Area (ac) Linear feet Fiber 2,264 NA (80% BA harvest) Recreation 3,883* NA Carbon 685 NA Watershed ,212 Services (No harvest SMZ Buffers) Biodiversity 630 NA (Non-timber) TOTALS: 3,976 *The area of recreation is considered co-use, in that it provides multiple services, and therefore will only be counted once in total area.

55 Dollars (US) Alternative pricing comparison Comparison of Management Schemes by Pricing Scenario Ecosystem Services Management Traditional Management 0.00 Pessimistic Most Likely Optimistic

56 Values comparison Traditional Management Scheme Service Pessimistic Most likely Optimistic Fiber 498, , , Recreation 40, , , TOTALS: $538, $706, $868, Ecosystem Services Management Scheme Service Pessimistic Most Likely Optimistic Fiber 375, , , Recreation 40, , , Carbon 9, , , Watershed 195, , , Biodiversity TOTALS: $621, $894, $1,363, All prices include a 5% discount rate

57 Dollars (US) Dollars (US) Pessimistic price comparions Traditional Management Scheme - Combined Pessimistic Prices Ecosystem Management Scheme - Combined Pessimistic Prices 600, , , , ,000 Recreation 500,000 Biodiversity 300,000 Fiber 400,000 Watershed Services Carbon 300,000 Recreation 200, ,000 Fiber 100, , Year Year

58 Dollars (US) Dollars (US) Most likely price comparisons Traditional Management Scheme - Combined Most Likely Prices Ecosystem Management Scheme - Combined Most Likely Values 800,000 1,000, , , , , ,000 Recreation 700, ,000 Biodiversity 400,000 Fiber 500,000 Watershed Services 300, ,000 Carbon 200, , , , ,000 Recreation Fiber Year Year

59 Dollars (US) Dollars (US) Optimistic price comparisons 1,000,000 Traditional Management Scheme - Combined Optimistic Prices 1,600,000 Ecosystem Management Scheme - Combined Optimistic Prices 900,000 1,400, , , , ,000 Recreation Fiber 1,200,000 1,000, ,000 Biodiversity Watershed Services Carbon 400, , , , ,000 Recreation Fiber 100, , Year Year

60 Discussion Additional revenues and making acres productive that may not have been otherwise Additional management actions could be incorporated into current practices Provide opportunity for management of other desirable species without market values Could provide for significant gains if applied to a larger portfolio Promote awareness and education of human impacts and dependence on ecosystem health

61 Conclusions Ecosystem markets are emerging but immature Ecosystem services management and marketing may offer additional revenues to landowners now and in the future Greater recognition of ecosystem service values could influence management policies

62 FORESTER PERSPECTIVES Landowners are not managing appropriately Who will tell owners what and when to cut? We tell them their management goals

63 NEOCLASSICAL RESPONSE Landowners ARE managing appropriately TO MAX U THE MARKET will tell owners what and when to cut? THEY KNOW their management goals