The supply of capital by sector is a vertical straight line. The demand for capital varies as does
the return to capital by sector.
The log supply resource shocks are implemented as proportional reductions in the baseline
availability of “federal government sales” of logs. Thus, the direct impacts of resource supply
shocks are treated as supply-side phenomena. This treatment has logical appeal and is also
consistent with neoclassical economic theory.
A key feature of the implemented CGE modeling framework is the ability to substitute
among public, private, and imported sources of logs via CES aggregation functions as described
in the previous section. The ease of substitution is determined by exogenously specified
elasticities and endogenous variation in the relative cost of inputs obtainable from the three
alternative sources of supply. An implication of the constant elasticity specification used here is
that, due to the law of diminishing returns, relatively small shifts in the availability of alternative
supplies are much more easily accommodated than are major shifts. In practice, we have assumed
that the substitution of private or imported logs to replace reduced public supplies is fairly difficult
due to high transportation costs, and the length of time necessary to alter timber growth and
harvest rotations.8
Empirical Results
Results for each scenario under alternative reductions in federal log supply are presented
below. Each scenario was simulated for eleven alternative harvest levels on Forest Service lands.
The eleven harvest levels were derived by reducing the allowed cut in increments of 10 percent
from the baseline level. Estimates of relative adjustments in output, income, government
8This assumption of difficult substitution results in larger estimates of economic impact in
response to a reduction in federal log supplies than would a less restrictive assumption.
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