**CERE Working Papers, CERE - the Center for Environmental and Resource Economics**
# No 2010:12:

Economic Evaluation of Biotechnological Progress: The effect of changing management behavior

*Peichen Gong *()

*, Karl-Gustaf Löfgren *()

* and Ola Rosvall*
**Abstract:** The paper assesses the welfare effects of biotechnological
progress, as exemplified by tree improvements, using a partial equilibrium
model. Timber demand is assumed to be stochastic and the distributions of
the coefficients of the demand function are known. Assuming that timber
supply is a log-linear function of timber price and forest inventory, we
determine the coefficients of the supply function by maximizing the
expected present value of the total surplus of timber production, both in
the presence and in the absence of genetically improved regeneration
materials. The supply functions are then used to estimate the expected
present values of the total surplus in different cases through simulation.
These estimates enable us to assess the direct effect and the total effect
of the genetically improved regeneration materials on the expected present
value of the total surplus. By taking the difference between these two
effects, we obtain an estimate of the effect of changing harvest behavior
induced by the use of genetically improved regeneration materials in
forestry. The main results of the study are (1) the presence of genetically
improved regeneration materials has significant impacts on the aggregate
timber supply function; (2) application of genetically improved
regeneration materials leads to a significant increase in the expected
present value of the total surplus; (3) a considerable proportion of the
welfare gain results from the change in timber harvest behavior; and (4)
the use of genetically improved regeneration materials reduces the profits
of timber production.

**Keywords:** timber market model; tree improvement; optimal harvesting decision; timber supply; (follow links to similar papers)

**JEL-Codes:** Q23; (follow links to similar papers)

46 pages, October 1, 2010

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