Abstract
Summary Recent Victorian forest policy changes have brought about a new system of allocating sawlogs to sawmills. As one of several changes brought about with the Value Adding Utilisation System (VAUS), the government may shift the allocation of high grade sawlogs towards sawmills which produce higher value products. The purpose is to promote stability, investment and employment in the timber industry. An economic analysis of sawmill production shows that efficient production decisions are determined by output prices. Government reallocation of sawlogs distorts sawmill decisions to produce sub-optimal sawmill profits. Strategic behaviour is also introduced which can further erode profitability. As a result, stability, investment and employment are unlikely to be encouraged by the allocative component of the VAUS.
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