forests

characteristics ► saleable commodity when harvested ► left standing, capital asset  increased growth following year  environmental services (watershed protection, wildlife habitat) ► harvest or wait? ► time btw initial investment (planting) and recovery (harvesting) LONG

harvesting decision ► when to harvest?  biological dimension  economics dimension

biology ► growth measured in cubic ft ► distinct growth phases  slow / rapid / slow ► abstracting from differences in weather / fertility / pests / fire / etc ► biological model: douglas fir

tree growth, Douglas Fir

mean annual increment (MAI) ► MAI = cumulative volume end of decade / cumulative yrs of growth ► biological decision rule: harvest when MAI maximized

biological harvesting decision

annual incremental growth ► AIG= change in volume / change in years  marginal growth ► if AIG>MAI, MAI increasing ► if AIG<MAI, MAI decreasing  similar to MC and ATC (GPA example)

economics ► use basic biological growth model as basis for economic decision rule ► harvest at age that maximizes PV of net benefits

two important costs 1. planting costs (example: $1,000) borne immediatelyborne immediately no discountingno discounting 2. harvesting costs (example: $.30 / cubic ft) time of harvesttime of harvest discounteddiscounted

economic harvesting decision

optimal harvest age ► discounting shortens optimal harvest time  less tolerant of slow timber growth  comparing no harvest (increase in value of timber) to harvest (sell and invest) ► high discount rates also destroy incentive to replant

sample problem AgeVolume (cubic ft) , ,000when to harvest 406,000using biological rule? 508,000using economic rule? Price: $2 Planting cost: $1,000 Harvest cost: $0.50 Discount rate: 3%

land conversion ► land should be allocated to highest valued use ► conversation occurs when relative values of competing uses change

allocating land to competing uses Net benefits per acre

efficient allocation ► closest land to agriculture (A) ► other land to forest (B) ► maximizes net benefits ► efficient conversion occurs when these net benefit functions change

changing net benefits ► agriculture  population increases (need more food)  new technology lower costs ► forests  demand for forest products changes

sources of inefficiency ► perverse incentives for landowner  privately owned forests ► externalities ► undervaluing standing forest: harvest inefficiently large amount of timber  publicly owned forests ► Brazil: reduced taxes for agriculture; squatting (more deforestation, more land acquired) ► US: concession agreements (limited term, too cheap)

sources of inefficiency ► perverse incentives for nation  biodiversity ► lost biodiversity: external cost not borne by individual loggers  global warming ► lost absorption and increased burning: external cost not borne by individual loggers

sustainable forestry? depends on what kind of sustainability ► economic sustainability  non-declining welfare among generations  fully compatible with efficiency as long as economic gains from harvest are reinvested and shared with future

environmental sustainability ► be able to harvest forever ► harvest growth, leaving volume the same ► efficiency not necessarily compatible ► need to compare  increasing value from delayed harvest  increasing value from harvest + investment

how to correct inefficiencies? ► charge concessionaires full social cost of harvest ► debt-nature swaps  cancel debt in return for preservation ► royalty payments  preservation of biodiversity  paid for genes obtained from resources