Forest Resources

© 2018 Taylor & Francis

 Contents
• Introduction
• Characterizing Forest Harvesting Decisions
• Sources of Inefficiency
• Poverty and Debt
• Sustainable Forestry
• Public Policy
• Summary
• Appendix
© 2018 Taylor & Francis
Introduction
• This chapter covers forests, forest management, and
sustainable forestry.
• Efficient allocations of the forest resource are defined
and examples of how economic incentives can be
used to protect biodiversity are presented.
• The calculation of optimal rotations is presented.
Timber values as well as biodiversity values of the
forest are highlighted.
• The problem of deforestation and potential solutions
are also emphasized.
© 2018 Taylor & Francis
Characterizing Forest Harvesting Decisions

• Special Attributes of the Timber Resource

– Timber is both an output and a capital good.
– The harvest decision involves how much timber to
harvest, how often to harvest it, and whether to
replant after harvesting.
– Standing trees are a capital asset. Tree growth
increases the harvestable volume and standing trees
provide watershed protection and wildlife habitat.
– Existence of externalities makes it difficult to define
the efficient allocation.

© 2018 Taylor & Francis

Characterizing Forest Harvesting Decisions

• The Biological Dimension

– Tree growth is measured on a volume basis.
– Young trees will grow tall quickly, but volume
growth is slow. Medium aged trees increase in
volume quite rapidly while mature trees grow very
slowly and eventually stop growing or reverse
growth.
– Growth will also be affected by weather, soil
fertility, disease, forest fires, etc.

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Model of Tree Growth in a Stand of Douglas Fir
trees in the Pacific Northwest.

© 2018 Taylor & Francis

Characterizing Forest Harvesting Decisions

• The Economics of Forest Harvesting

– The optimal time to harvest from a profit maximization
perspective would be the age that maximizes the
present value of net benefits from the wood.
• Benefits are measured using the potential volume of wood
given the growth rate and the price of the lumber. The
annual incremental growth represents the marginal growth.
• Planting costs are immediate and thus are not discounted
while harvesting costs are discounted because they are paid
in the future.

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Characterizing Forest Harvesting Decisions

– Net benefits are calculated by subtracting the

present value of costs from the value of the
timber at harvest age.
– The discount rate will affect the harvest decision.

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Economic Harvesting Decision

© 2018 Taylor & Francis

Characterizing Forest Harvesting Decisions

• Harvesting costs are discounted and are

proportional to the amount of timber harvested.
• The net benefit of a unit of wood harvested at any
age is the price of the wood minus the marginal cost
of that unit.
• A tax levied on each cubic foot of wood harvested
would simply raise the marginal cost of harvesting
by the amount of the tax.
• High discount rates and high replanting costs could
make replanting prohibitively expensive.
© 2018 Taylor & Francis
Characterizing Forest Harvesting Decisions

• Extending the Basic Model

– The infinite-planning model is different from the
single-harvest model in that it recognizes the
interdependencies between periods.
• Decisions to delay harvests impose costs on the next
harvest period. For this case, the opportunity cost of
delaying the next rotation must be outweighed by the
gain in tree growth.

© 2018 Taylor & Francis

Characterizing Forest Harvesting Decisions

– All else constant, the optimal rotation in the

infinite-planning case is shorter than in the single-
harvest case.
• The marginal cost of delay is higher since there is now
an opportunity cost of starting the next cycle later.
Thus, the optimal rotation is shorter.

© 2018 Taylor & Francis

Sources of Inefficiency
• Perverse Incentives for the Landowner
– Perverse incentives create inefficient and unsustainable
outcomes especially with respect to privately owned
forests.
– The value of a standing forest as wildlife habitat or
ecosystem function is an external cost. Failure to
recognize social values will result in inefficiencies.
– External costs of timber harvesting may not be
adequately considered by the private landowner.
– Government policies can also create perverse
incentives.
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Sources of Inefficiency
– Government resettlement programs have also
encouraged deforestation by facilitating the
movement of migrants into agriculture.
– Concession agreements are another source of
inefficiency. Concession agreements define the
terms under which public forests can be harvested.
– Deforestation can result from illegal activities.
• Obvious case: illegal harvesting
• Less obvious case: narco-deforestation

© 2018 Taylor & Francis

Sources of Inefficiency
• Perverse Incentives for Nations
– Deforestation involves transboundary or global
externalities.
• Biodiversity: Deforestation is a major source of species
loss. Many benefits of species preservation are external
to the country with the forest.
• Climate change: Deforestation contributes to climate
change, but the benefits of leaving the trees standing
are largely external. The costs, however, are largely
internal.

© 2018 Taylor & Francis

Poverty and Debt
• Unowned or publicly owned forests are
sometimes seen as a means of providing land
to peasants.
• Poverty and deforestation can reinforce each
other through positive feedback loops.
• At the national level, large debts in many
developing countries encourage the
overexploitation of resources in order to raise
foreign exchange to finance the debt.
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Sustainable Forestry
• Profit-maximizing decisions may not be efficient
due to externalities.
• Efficiency and sustainable forestry are not
necessarily compatible.
• Practices aimed at sustainable forestry that are
also economically sustainable have led to
a focus on rapidly growing trees and plantation
forestry.
• Plantation forestry is controversial.
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Public Policy
• One public policy approach involves restoring
efficient incentives.
• Another approach involves enlisting the power
of consumers in the cause of sustainable
forestry.

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Public Policy
• Debt-for-nature swaps
– An agency, usually a nongovernmental
organization, purchases developing country debt,
typically at a discount if repayment by the
developing country is unlikely.
– The nongovernmental organization then “trades”
(cancels) the debt back to the developing country
in exchange for an environmental action such as
the protection of a tropical forest.

© 2018 Taylor & Francis

Public Policy
• Extractive Reserves
– One strategy specifically designed to protect the
indigenous people of the forest as well as to
prevent deforestation involves the establishment
of extractive reserves.
– Area reserved for the indigenous people to
engage in the traditional hunting-gathering
activities.

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Public Policy
• Conservation Easements and Land Trusts
– A conservation easement is a legal agreement
between a land owner and a land trust or a
government agency. Conservation easements can
be sold or donated.

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Public Policy
• The World Heritage Convention
– The World Heritage Convention requires 1
percent of contributions to UNESCO to be put into
a World Heritage Fund. The fund is used to protect
cultural and natural environments of “outstanding
universal value.”
– Ratifying countries can have their natural
properties of outstanding value added to the
World Heritage List and apply for funds to help
protect these sites.

© 2018 Taylor & Francis

Public Policy
• Royalty payments
– They grant payments to biologically rich countries
for all products developed from species in those
countries.
– These royalties are incentives for countries to
preserve their biological diversity. Pharmaceutical
companies have been making payments based on
shared profits.

© 2018 Taylor & Francis

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Public Policy
• Financial transfers
– Debt-nature swaps, extractive reserves, royalty
payments, carbon sequestration credits, and
conservation easements all involve financial
transfers from the industrialized nations to the
tropical nation.
– Tourist revenues have become a popular source
for preservation.

© 2018 Taylor & Francis

© 2018 Taylor & Francis
Summary
• Tree stands growth phases
• The efficient time to harvest
• Factors that affect efficient rotation
• Inefficient deforestation
• Schemes to restore efficiency and
sustainability

© 2018 Taylor & Francis

Appendix The Harvesting Decision: Forests

• Suppose that an even-aged stand of trees is to

be harvested at an age that maximizes the
present value of the harvested timber.
• That age can be found by (1) defining the
present value of the harvested timber as a
function of the age of the stand, and (2)
maximizing the function with respect to age.

© 2018 Taylor & Francis

where
P = the price received per unit of harvested
volume
V(t) = the volume of timber harvested at age t
Ch = the per-unit cost of harvesting the timber
t = the age of the timber, and
Cp = the fixed cost of planting

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• Taking the derivative of the function with respect to
age and setting it equal to zero:

This implies that the rate of return from letting the

stand grow over the last increment of age should be
equal to the market rate of return.

© 2018 Taylor & Francis