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Forest Taxation and Timber Supply Under Price Uncertainty: Perfect Capital Markets

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This paper provides a detailed analysis of timber harvest decisions under price uncertainty. Specifically, the relationship between timber supply--in the sense of whether to bring harvest to the market now or in the future--and various forest taxes is analyzed by using an intertemporal consumption-savings model, which is extended to allow for harvesting decisions. In the presence of perfect capital markets and certainty, harvesting decisions of nonindustrial forest owners are independent from their consumption preferences. However, under future timber price uncertainty and risk aversion, harvesting decisions depend on the consumption preferences of forest owners. The implications of this nonseparability between consumption and harvesting decisions are developed for various individual forest taxes as well as for various changes in the structure of forest taxes, which will keep the government's tax revenue constant. Due to the nonseparability, harvest responses to changes in tax rates and in the structure of taxes may differ considerably from those under certainty. For. Sci. 35(1): 137-159.

Keywords: Timber supply; forest taxes; risk aversion

Document Type: Journal Article

Affiliations: Department of Economics, University of Helsinki, Aleksanterinkatu 7, 00100 Helsinki, Finland

Publication date: March 1, 1989

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