Structure And Efficiency Of Timber Markets

Abstract

Perfect competition has long been the standard by which economists have judged the market's ability to achieve an efficient social outcome. The competitive process, unfettered by the imperfections discussed below, forges an outcome in which goods and services are produced at their lowest possible cost, and market equilibrium is achieved at the point at which the cost of the last unit supplied just equals its value in use to the demander. This point maximizes the amount of utility that consumers obtain and the profit that producers procure through the existence of the market. Therein lies the appeal of perfect competitive markets. Evidence presented in this chapter suggests that timber markets possess certain structural characteristics that may impede perfectly competitive outcomes and thus warrant further scrutiny. Beyond the general concern about the social costs of any form of imperfect competition, why would a policy maker be particularly concerned about the lack of perfect competition in timber markets? The answer lies in the ability of the market to guide society toward an optimal allocation of resources (labor, capital, land) to forestry and forest-based production. If, for example, lack of competition among buyers were to drive down timber prices, the less profitable timber investments would be, and the less profitable forested land use would be. In principle, a lower price for timber causes less land to be in forest base than would otherwise be the case (Hardie et al. 2000). Not only does this diminish the ability of society's forests to provide the efficient amount of timber and other marketed forest outputs, it also reduces the production of nonmarket goods and services provided by forests, such as wildlife habitat, watershed protection, aesthetics, and biodiversity. Thus private market imperfections can have public goods consequences. Sills and Abt (eds.), Forests in a Market Economy, 153-176.