NATURAL RESOURCE SUPPLY CONSTRAINTS AND REGIONAL ECONOMIC ANALYSIS: A COMPUTABLE GENERAL EQUILIBRIUM APPROACH

reduction in log supply from federal lands in the West, total log supply will decline and product
price will increase in national markets, ceteris paribus, for both logs and wood products. We
investigated the impact such price changes would have on our timber dependent regional
economy assuming a 50 percent reduction in federal log supply that is accompanied by modest
price increases in the price of both logs and wood products at the national level. In the regional
CGE model, national prices are treated as exogenous and industries in the region are treated as
price takers. Changes in national prices are simulated in the model as changes in the export price
and the import price of logs and wood products.

The price elasticity of demand for both logs and for wood products is quite inelastic in the
short-run (Adams 1999; Haynes, Adams, and Mills, 1995). The hypothesized 50 percent
reduction of federal log supply (relative to the 1997 baseline) translates roughly into a 5 to 10
percent reduction in total national softwood log supply. As national log prices increase, private
log harvest will increase to take advantage of the price increase and so instead of a 10 percent
reduction of national log supply, perhaps the public plus private reduction may be more on the
order of 2 or 3 percent of supply. With a national price elasticity of demand for logs of between -
.15 and -.25, the expected national log price increase would be expected to conservatively range
between 5 and 15 percent. Accordingly, national log price shocks in the range of 5 to 15 percent
were simulated with the CGE model.

The expected price effect in the wood product market is more difficult to predict. The
lumber and wood products price elasticity of demand is estimated as -.15 (Adams, 1999; Haynes,
Adams, and Mills, 1995). On the assumption that substitutes for wood products are readily
available, the range of possible increases in wood products price stemming from a 50 percent
reduction in forest service log supply was limited to a maximum of 6 percent.

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