forestsforests

characteristicscharacteristics

► saleable commodity when harvestedsaleable commodity when harvested

► left standing, capital assetleft standing, capital asset increased growth following yearincreased growth following year environmental services (watershed protection, environmental services (watershed protection,

wildlife habitat)wildlife habitat)

► harvest or wait?harvest or wait?

► time btw initial investment (planting) and time btw initial investment (planting) and recovery (harvesting) LONGrecovery (harvesting) LONG

harvesting decisionharvesting decision

►when to harvest?when to harvest? biological dimensionbiological dimension economics dimensioneconomics dimension

biologybiology

► growth measured in cubic ftgrowth measured in cubic ft

► distinct growth phasesdistinct growth phases slow / rapid / slowslow / rapid / slow

► abstracting from differences in weather / abstracting from differences in weather / fertility / pests / fire / etcfertility / pests / fire / etc

► biological model: douglas firbiological model: douglas fir

tree growth, Douglas Firtree growth, Douglas Fir

mean annual increment (MAI)mean annual increment (MAI)

►MAI = cumulative volume end of MAI = cumulative volume end of decade / decade /

cumulative yrs of growthcumulative yrs of growth

►biological decision rule: harvest when biological decision rule: harvest when MAI maximizedMAI maximized

biological harvesting decisionbiological harvesting decision

annual incremental growthannual incremental growth

►AIG= change in volume / change in AIG= change in volume / change in yearsyears marginal growthmarginal growth

► if AIG>MAI, MAI increasingif AIG>MAI, MAI increasing

► if AIG<MAI, MAI decreasingif AIG<MAI, MAI decreasing similar to MC and ATC (GPA example)similar to MC and ATC (GPA example)

economicseconomics

►use basic biological growth model as use basic biological growth model as basis for economic decision rulebasis for economic decision rule

►harvest at age that maximizes PV of harvest at age that maximizes PV of net benefits net benefits

two important coststwo important costs

1.1. planting costs (example: $1,000)planting costs (example: $1,000)• borne immediatelyborne immediately• no discountingno discounting

2.2. harvesting costs (example: $.30 / harvesting costs (example: $.30 / cubic ft)cubic ft)

• time of harvesttime of harvest• discounteddiscounted

economic harvesting decisioneconomic harvesting decision

optimal harvest ageoptimal harvest age

►discounting shortens optimal harvest discounting shortens optimal harvest timetime less tolerant of slow timber growthless tolerant of slow timber growth comparing no harvest (increase in value comparing no harvest (increase in value

of timber) to harvest (sell and invest)of timber) to harvest (sell and invest)

►high discount rates also destroy high discount rates also destroy incentive to replantincentive to replant

sample problemsample problem

AgeAge Volume (cubic ft)Volume (cubic ft)

1010 700700

2020 1,0001,000

3030 3,0003,000 when to harvestwhen to harvest

4040 6,0006,000 using biological rule?using biological rule?

5050 8,0008,000 using economic rule?using economic rule?

Price: $2Price: $2

Planting cost: $1,000Planting cost: $1,000

Harvest cost: $0.50Harvest cost: $0.50

Discount rate: 3%Discount rate: 3%

land conversionland conversion

► land should be allocated to highest land should be allocated to highest valued usevalued use

►conversation occurs when relative conversation occurs when relative values of competing uses changevalues of competing uses change

allocating land to competing usesallocating land to competing uses

Net benefits per acre

efficient allocationefficient allocation

►closest land to agriculture (A)closest land to agriculture (A)

►other land to forest (B)other land to forest (B)

►maximizes net benefitsmaximizes net benefits

►efficient conversion occurs when these efficient conversion occurs when these net benefit functions changenet benefit functions change

changing net benefitschanging net benefits

►agricultureagriculture population increases (need more food)population increases (need more food) new technology lower costsnew technology lower costs

►forestsforests demand for forest products changesdemand for forest products changes

sources of inefficiencysources of inefficiency

►perverse incentives for perverse incentives for landownerlandowner privately owned forestsprivately owned forests

►externalitiesexternalities►undervaluing standing forest: harvest undervaluing standing forest: harvest

inefficiently large amount of timberinefficiently large amount of timber

publicly owned forestspublicly owned forests►Brazil: reduced taxes for agriculture; squatting Brazil: reduced taxes for agriculture; squatting

(more deforestation, more land acquired)(more deforestation, more land acquired)►US: concession agreements (limited term, too US: concession agreements (limited term, too

cheap)cheap)

sources of inefficiencysources of inefficiency

►perverse incentives for perverse incentives for nationnation biodiversitybiodiversity

►lost biodiversity: external cost not borne by lost biodiversity: external cost not borne by individual loggersindividual loggers

global warmingglobal warming►lost absorption and increased burning: lost absorption and increased burning:

external cost not borne by individual loggersexternal cost not borne by individual loggers

sustainable forestry? sustainable forestry? depends on what kind of sustainability depends on what kind of sustainability

►economic sustainabilityeconomic sustainability non-declining welfare among generationsnon-declining welfare among generations fully compatible with efficiency as long as fully compatible with efficiency as long as

economic gains from harvest are economic gains from harvest are reinvested and shared with future reinvested and shared with future

environmental sustainabilityenvironmental sustainability

► be able to harvest foreverbe able to harvest forever

► harvest growth, leaving volume the sameharvest growth, leaving volume the same

► efficiency not necessarily compatibleefficiency not necessarily compatible

► need to compareneed to compare increasing value from delayed harvestincreasing value from delayed harvest increasing value from harvest + investmentincreasing value from harvest + investment

how to correct inefficiencies?how to correct inefficiencies?

►charge concessionaires full social cost charge concessionaires full social cost of harvest of harvest

►debt-nature swapsdebt-nature swaps cancel debt in return for preservationcancel debt in return for preservation

►royalty payments royalty payments preservation of biodiversitypreservation of biodiversity paid for genes obtained from resourcespaid for genes obtained from resources