Market Imperfections—Causes and Implications 
The best quantitative measure of market imperfection for 
timber supplies is the coefficient of price elasticity of 
supply. This coefficient is a measure of the percentage 
change in stumpage (timber) supply resulting from a per- 
centage change in stumpage prices. For example, with a 
10-percent increase in stumpage prices, if stumpage supplies 
increase 3 percent, the coefficient of price elasticity would 
be 0.3. In simpler terms, it is a measure of the responsive- 
ness of forest owners to price changes. The further the 
coefficient falls below 1.0, the more unresponsive or 
imperfect the market. 
Relatively few studies of the price elasticity of stumpage 
supply have been made. The fundings of the major ones 
are summarized in Cubbage and Haynes’ report ‘‘Evaluation 
of Market Responses to Timber Scarcity Problems’’ 
(referenced at the start of chapter 2). These studies have 
shown that the price elasticities of stumpage supply are 
inelastic, generally ranging below 0.4. This means that the 
free market system does not work very well for timber 
supply—it is to a large degree unresponsive to price 
changes. 
There are five major causes of imperfection in timber 
markets: 
1. Failure of the stumpage market price to reflect all bene- 
fits associated with forests, such as the provision of wild- 
life habitat, scenic beauty, and improved water quality; and 
all costs such as the pollution resulting from the use of 
chemicals and fires. 
2. The short time-preference of individual landowners, 
which constrains investments in management options yield- 
ing rewards after an extended period of time. 
3. Lack of investment capital and market and management 
knowledge among private timber owners. 
4. Ownership objectives that limit or constrain timber 
production. 
5. Limited competition among timber buyers. 
The market system also has no means of adequately 
recognizing societal interests in the protection of the forest 
environment and the maintenance of the resource base and 
the productive capability of forest land. 
Market imperfections and the associated low price elas- 
ticity of stumpage supply have been the chief cause of the 
increases in the relative prices of stumpage and most tim- 
ber products that have taken place for decades, and even 
centuries in the case of lumber. These longrun rising real 
prices are simply another quantitative measure of the low 
price elasticity of stumpage supply. This low price elastic- 
ity is also reflected in rapid changes in the prices of stump- 
age and many timber products. Limited supply responses, 
along with inelastic demand for many timber products, have 
been the chief cause of the large cyclical swings in stump- 
age and lumber prices referenced in chapter 2 and shown in 
the historical data in the associated appendix tables. 
Rising real prices and price cycles have important and ad- 
verse impacts on the economy and the environment. In re- 
sponse to the need to constrain these effects and to protect 
the forest environment and the productive capability of for- 
est land and the timber resource, society has developed an 
array of policies and programs to increase forest produc- 
tivity. These include the public and private programs of 
protection, research, education, technical and financial 
assistance, public ownership, and special tax laws and for- 
est practices acts that have been described in the preced- 
ing chapters. Although it has not been recognized in any of 
the supporting legislation, and in only a limited way in the 
forestry literature, all of these things are means of dealing 
with market imperfections. 
By any standard, these policies and programs have 
worked. They have resulted in the regeneration of the sec- 
ond and third forests and made possible the development 
and growth of the forest industries, which now constitute 
such an important part of the South’s economic base. The 
programs are also efficient—the benefits exceed the cost— 
and they are effective in increasing the income of timber- 
land owners. 
But they are not enough. If future employment and in- 
come in the forest industries are to be sustained, action must 
be taken to expand both public and private programs that 
are effective in increasing timber supplies. This can be done 
in a variety of ways, but market forces must be 
supplemented. There is simply no alternative if the timber 
resource is to maintain its important place in the economy 
of the South. 
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