Substitution, technical change and returns to scale in British Columbian wood products industries

Abstract

The size and quality of timber in British Columbia declined steadily through the 1960s and 1970s. This paper presents estimates of factor substitution, technical change and returns to scale for four British Columbian wood products industries – interior and coast sawmills and planing mills, shingle mills and plywood and veneer mills – using pooled cross-section time-series data, 1963–79. Estimates of capital stocks are not available for these industries, so estimates of capital services are computed from aggregate capital stock and energy consumption data. The estimated cost functions are well behaved and show that all the inputs (capital services, materials and labour) are substitutes. Thus, capital services and labour can be substituted for the increasingly scarce natural resource. The input demand functions slope down and are inelastic. Interior sawmills exhibit constant returns to scale while the other industries show increasing returns to scale. The technical change is capital services using, labour saving, and materials saving or neutral in all industries. Thus the industries adjust to the declining quality of timber by adopting more capital intensive production processes. However, the substitution and technical change is not enough, and all of the industries experience increasing average cost over the sample, holding output and input prices constant.

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