Question

Suppose that climate change is expected to increase the rate of future forest fires, and hence lower the amount of timber that can be produced per acre of forestland. Timber is used to produce market goods such as paper and solid wood for houses.

a. Draw a supply-and-demand diagram to show what happened to price, quantity, and total surplus in the market for timber.

b. Recycled paper is a substitute for paper produced from timber. The home-building industry uses timber as an input into the construction of new houses. Let’s use the concepts of consumer and producer surplus to consider the case of producers of recycled paper and consumers of new homes. Who, if anyone, will lose surplus? Who, if anyone, will gain surplus? Use the supply-and-demand model to support your answer.

Answer 1

Solution:

a.

The price increases, quantity decreases and total surplus also decreases.

b. For new home purchasers, the consumers will lose consumer surplus because price has increased in anticipation of decrease in supply. It can be shown from above diagram.

Due to decrease in supply of timber, the demand for recycled paper will increase as it is a substitute. Hence, the producer surplus of producers of recycled paper will increase.