Factor substitution and economies of scale in the Alberta sawmill industry

Abstract

An analysis of cross-sectional data reveals that a nonhomothetic transcendental logarithmic cost function provides an appropriate representation of the structure of the Alberta sawmill industry. While the econometric approach used is well established, its application to forestry using cross-sectional data is rare. In this study, mill lumber output was specified as a function of the input prices for labour, capital, wood, and energy. All own-price elasticities are significant and negative as expected. There are significant degrees of factor substitution among the inputs in the sawmills in response to changes in factor prices. Virtually all mills have positive scale economies. There is a positive association between larger sawmills and significant scale economies. These results have important implications regarding long-term timber supply and economic efficiency.