2. Demand: Marginal Willingness to Pay


Next let's analyze the demand for seedlings. Why are the seedlings produced? Intuitively the answer must relate to the "value" that someone places on seedlings. As an example, it is illegal in many countries to leave a forest stand idle after clear-cutting. Also, relying on natural regeneration may be too risky for a private forest owner. Therefore, there is a demand among forest owners for seedlings to be used in stand establishment (planting) after clear-cutting.

This demand is expressed as a willingness to sacrifice something to obtain seedlings. In a monetized economy it makes sense to measure this "something" as generalized purchasing power. As a consequence, we use willingness to pay (WTP) as a fundamental economic concept of value. Individual tastes and preferences mostly determine willingness to pay, but importantly WTP also reflects the ability to pay.

In general, the demand curve is derived from the principle of diminishing marginal utility and it shows the amount of a good (or service) consumers would buy at different prices over some time period. Diminishing marginal utility implies that as the number of units consumed increases, the willingness to pay for additional units of that good (i.e., marginal WTP, MWTP) goes down.

Let's assume that a forest owner has clear-cut 5-ha forest stand (quite large) and is just thinking about investing in the stand establishment by planting 2-year old Norwegian Spruce seedlings. Due to legislative constraints she would probably be willing to pay quite a lot of money for the first unit (10,000 seedlings per 5-ha) of seedlings rather than go without, and perhaps she would be willing to pay as much as 3,000 € as in Figure E3. But the additional WTP for the second unit (again 10,000 seedlings per 5-ha) is probably lower (2,000 € in Figure E3).

If the forest owner already has two units (totaling 20,000 seedlings per 5-ha), her willingness to pay for additional units may go down quite rapidly, to 500 € for unit 3,100 € for unit 4 and finally zero for unit 5. The total willingness to pay (TWTP) for 20,000 seedlings per 5-ha refers to the total amount a forest owner would be willing to pay to attain that amount of seedlings rather than go without seedlings entirely. In this illustrative example, this amount is 5,000 € (3,000 € + 2,000 €).

Figure E3: Forest owner's (marginal) willingness to pay for seedlings (diagram is step-shaped since the unit for seedlings is an integer package of 10,000 seedlings)

By adding the quantities of seedlings consumed by each forest owner at each price (i.e. by horizontal sum), we can get the market demand curve (or aggregate marginal willingness to pay curve) similarly as in the case of supply curves. Note also that willingness to pay and actual expenditure on seedlings are two different things. In a competitive market, all buyers pay the same price for the good, for example € 2 000 per 10,000 seedlings (individual forest owners are such a tiny proportion of the market that they are not able to change the price). Some forest owners are still willing to pay more than the market price at least for the first units of seedlings.

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