Scandinavian Working Papers in Economics

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
Additional contact information
Peichen Gong: CERE, Postal: Centre for Environmental and Resource Economics (CERE), Umeå University and Swedish University of Agricultural Sciences, Umeå, Sweden
Karl-Gustaf Löfgren: CERE, Postal: Centre for Environmental and Resource Economics (CERE), Umeå University and Swedish University of Agricultural Sciences, Umeå, Sweden
Ola Rosvall: SkogForsk, Postal: The Forestry Research Institute of Sweden, Umeå, Sweden

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

JEL-codes: Q23

46 pages, October 1, 2010

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