Transcript Chapter 12

The Economic Approach to
Environmental and Natural
Resources, 3e
By James R. Kahn
© 2005 South-Western, part of the Thomson Corporation
Part III
Renewable Resources and
the Environment
Chapter 11
Temperate Forests
© 2004 Thomson Learning/South-Western
Introduction
 The historical emphasis of forest economics has
been on how to maximize wealth to be derived from
the harvesting of the forest's wood.
 A contrasting viewpoint expressed by later
conservationists, such as John Muir (1838-1914),
was that the forest was a synergistic system and
that the benefits derived from a forest were derived
primarily through the preservation of the forest,
although timbering of some forest land was certainly
appropriate.
 This chapter looks at the traditional problem of how
to maximize income derived from timbering, as well
as the more general problem of maximizing the total
social benefits arising from the forest.
4
Forest Ecology
 Temperate forests, the type found in North
America are found south of the Tropic of
Capricorn and north of the Tropic of Cancer.
 In between are tropical forests.
 The forest is more than a collection of trees.
 It is a collection of plant, animal, bacterial,
and fungal organisms that interact with the
physical environment and with one another.
 A forest is an example of a climax
community.
5
Forest Ecology
 A climax community is an ecosystem that
has arisen out of competition with other
communities of organisms.
 An area of land may be first populated by
grassland, then small woody plants, then fast
growing trees, and finally slower growing
trees, such as oak and maple.
 The process of soil formation and nutrient
cycling is a good example of how organisms
interact with the physical environment.
6
Forest Ecology
 Nutrient cycling refers to the process by which the
basic life nutrients (phosphorus, potassium, and
nitrogen) are absorbed from the physical
environment by various organisms in the
ecosystem, transferred from organism to organism,
and eventually returned to the soil.
 As Figure 12.1 illustrates, nutrients in soils are
absorbed by roots of trees and other plants.
 These nutrients return when plants die and decay,
when animals eat plants and their waste is returned
to soil and when other animals eat these animals and
waste is returned to the soil.
7
8
Forest Ecology
 Forests play an essential role in carbon cycling
when they remove carbon dioxide from the
atmosphere and sequester it in their woody tissue.
 This basic building block is then available to other
organisms who consume the tree.
 Forests also play an important part in the
hydrological cycle.
 Leaves of the forest slow the velocity of the rain,
allowing a slow trickle of water to organic matter
below.
 The result is more water absorbed by the soil, more
water reaching underground aquifers and less soil
erosion due to run-off.
9
Forest Ecology
 Forest ecosystems are important providers of
ecological services.
 In addition to the forests’ contribution discussed
above, forests are important to flood protection,
biodiversity, soil formation, and erosion control.
 Forests also provide important aesthetic and
recreational benefits and production activities.
 Productive activities include harvesting animals,
mushrooms, berries, mining and grazing of livestock
and the harvesting of wood.
10
The Privately and Socially Optimal
Management of Forests
 Optimal management of forests is ultimately linked
to the type of ownership.
 Forest ownership can be divided into three primary
categories: forests owned by households, forests
owned by firms in the forest industry, and publicly
owned forests.
 It is difficult to identify a single management strategy
for household owned forests.
 Strategies vary by owner and can take the form of
profit maximization, utility maximization or a
combination of both.
11
The Privately and Socially Optimal
Management of Forests
 The second major class of forest ownership
is ownership by firms of the forest product
industry.
 These firms, which include Boise-Cascade,
Weyerhaeuser, and Georgia-Pacific, seek to
maximize the present value of earnings
derived from the forest.
 In addition to harvesting timber from their
own land, these firms also lease harvesting
rights on both private and public lands.
12
The Privately and Socially Optimal
Management of Forests
 Publicly owned forests include national
parks, national forests, and state and local
parks and forests, as well as publicly owned
tracts of forests, wildlife refuges, game
management areas, and nature preserves.
 Generally these publicly owned forests are
managed for multiple uses and not just the
generation of income from timber harvesting.
13
Maximizing the Physical Quantities of
Harvested Wood
 There are two basic methods for maximizing the
physical quantity of wood derived from the forest.
 One involves letting the forest grow until it reaches
its peak volume and then cutting it.
 The forest is then replanted, and the process is
allowed to repeat itself.
 The other method chooses the length of the harvestreplant-harvest cycle to maximize the total harvests
of wood that can be achieved over time.
 This is referred to as the rotation of forest.
 The length of the rotation cycle is chosen to
maximize the flow of wood.
14
Maximizing the Physical Quantities of
Harvested Wood
 The length of time in the rotation for either of these two
strategies is critically dependent upon the way in which trees
grow.
 The growth of trees is dependent on the density of the stand of
trees, the soil condition, weather and rainfall, and the incidence
of disease and pests.
 It is important to consider growth of the stand of trees and not
the individual trees.
 After replanting, the trees initially grow at a rapid rate, but the
mass of wood is relatively small.
 As trees mature growth eventually slows.
 Growth can become negative as disease and death associated
with aging has a greater impact.
 As illustrated in Table 12.1, Figure 12.2a, and Figure 12.2b,
growth of a hypothetical stand of trees can be expressed as a
function of the age of the trees in the stand.
15
16
17
Maximizing the Physical Quantities of
Harvested Wood
 It is not as easy to see when the total amount of wood that is
harvested over time is maximized.
 One way to increase the flow of wood is to harvest more
frequently.
 However, the more frequently you harvest, the younger and
smaller the trees.
 The alternative is to harvest less frequently and have bigger
harvests.
 The optimal time to harvest is at the age that maximizes the
average growth of the tree over its lifetime.
 If average growth is maximized over a sequence of multiple
rotations, then total growth will be maximized as well.
18
The Optimal Rotation
 The choice of optimal rotation is conceptually very simple. The
forest manager must ask “Are the benefits of making a rotation
a year longer (or a year shorter) greater than the costs?”
 The complexity is in determining the costs and benefits.
 Figure 12.3 illustrates the time paths of benefits and costs from
timbering.
 Revenue is generated at harvest and is referred to as stumpage
value.
 The costs include planting, maintenance such as disease
control, fire prevention, thinning, pruning and removal of
deadwood and pest control.
 The forest manager's job is to maximize the present value of
this stream of costs and benefits by deciding the optimal
rotation length.
19
20
The Optimal Rotation
 The costs of letting trees grow for another year
include both out-of-pocket costs and opportunity
costs.
 Out-of-pocket costs include disease prevention,
thinning, fire prevention and control of pests.
 Opportunity costs are based on foregone income
plus two other categories: interest income and
potential rent.
 Interest income (rV) is income that would have been
earned if trees had been harvested, sold, and the
money invested and potential rent (OCL) is
associated with trees being harvested and the land
rented.
21
The Optimal Rotation
 In modeling the optimal rotation, out-of-pocket expenses are
assumed to be zero.
 Additional assumptions include that the real price of a cubic
foot of wood does not change over time.
 The assumption that out-of-pocket expenses are zero implies
that periodic cutting of the forest stand is sufficient.
 If out-of-pocket expenses are sufficiently high, then it is
possible that the forest should never be cut.
 The benefits of allowing the trees to grow come from the
possibility of greater quantities of wood to sell.
 The benefits are critically dependent on the shape of the
marginal growth (annual increment) function of the trees.
22
The Optimal Rotation
 The additional revenue associated with increasing the length of
rotation is represented by DV/Dt , the derivative of the
stumpage value with respect to time.
 The stumpage value function reaches its maximum when
DV/Dt=0, that is when lengthening the rotation has no impact
upon stumpage value.
 The opportunity cost of land is represented by the function
OCL.
 This opportunity cost is the interest that could be earned from
the sale of land. It is also equal to the annual rent that could be
earned.
 The maximum value for OCL will occur when rotation is at its
optimal length. Here the forest will be most valuable.
23
The Optimal Rotation
 When rV + OCL (the sum of the two opportunity costs) are
equal to the marginal benefits of changing rotation length
(DV/Dt), the present value of the whole future stream of
harvests is maximized.
 Any external changes that shift DV/Dt upward will, ceterus
paribus, lengthen the optimal rotation.
 Likewise, any external changes that shift either rV or OCL
upwards will, ceterus paribus, shorten optimal rotation.
 An example would be an increase in the price of timber that
would increase the stumpage value (V), which would increase
DV/Dt and increase rV and OCL.
 An increase in DV/Dt lengthens the rotation while an increase in
rV and OCL shortens the rotation.
 Which effect dominates depends upon the interest rate.
24
The Optimal Rotation
 One shortcoming of the optimal rotation model is the failure to
include benefits associated with standing forests, which
includes watershed protection, wildlife habitat, and recreation
and so on.
 Bowes and Krutilla point out in their study that relationships
between the length of the harvest rotation and non-harvest
benefits are likely to be irregular, illustrated by the multi-peaked
function in Figure 12.4.
 Figure 12.6 illustrates the optimal rotation when non-harvested
benefits are considered.
 The maximum of the total benefits function is to the right of the
maximum of the timber harvested function, implying that
considering non-harvested benefits will lengthen optimal
rotation.
 If non-harvest benefits are large enough, the optimal harvest
rotation may be to never harvest.
25
26
27
The Optimal Rotation
 Both harvested and non-harvested benefits from a
particular stand of forest are dependent on the
quantity and quality of other forest stands.
 The price of timber is determined by the quantity and
quality of other forest stands.
 Elimination of non-harvest benefits by harvesting
may have an impact upon non-harvest benefits of
other forest stands.
 Clear cutting scars the landscape and reduces the
recreational value of remaining landscape.
 The degree of forest fragmentation caused by
harvesting is extremely important to species habitat
and biological diversity.
28
Multiple Use Management
 The Multiple Use Sustained Yield Act (MUSYA) of 1960
specifically charges the U.S. Forest Service with managing to
promote benefits from both timber and non-harvest benefits.
 One set of uses of forest specified by the MUSYA includes
those that generate revenue for forest service such as timber,
grazing, mineral and energy mining, and fee recreation.
 Grazing is possible because a forest is generally defined as an
area in which at least 10 percent of land area is covered by a
canopy of trees.
 Approximately 100 million acres of national forest land is
currently available for ranchers, of which 50 percent is suitable
of grazing.
 Bowes and Krutilla charge that the payment made for use of
this land is below market price.
29
Multiple Use Management
 An alternative set of uses for the forest resource
does not generate revenues and is often called
nonmarket use.
 These include open-access (unpriced) recreation,
watershed maintenance, wilderness, and fish and
wildlife value.
 Not only do market and nonmarket uses conflict but
also many nonmarket uses conflict with one another.
 Too many recreationists can lead to environmental
degradation which leads to a decline in wildlife
numbers and diminished watershed attributes.
 Hikers conflict with trail bikers or skiers with
snowmobiles.
30
Multiple Use Management
 Many critics of U.S. Forest Service policy feel that management
has been slanted towards timber production.
 In the late 1970s, the National Resources Defense Council
focused on the existence of below cost timber sales and the
inefficiencies that they create, including depressing the
profitability of privately owned forests.
 Below market timber sales are those sales of timbering rights
on public land, where revenues do not cover the timber related
forest management expenses.
 When applied to forests, the theory of comparative advantage
argues that even though some of the best wood in the world
can be produced from old growth red wood, spruce, fir and
sequoia forests in the Pacific Northwest, the comparative
advantage of these forests is in the production of ecological
services, aesthetic benefits and recreational opportunities.
31
Below-Cost Timber Sales
 A general guideline for proper use of public forest land is that a
forest should be used for timbering if the present value of the
net benefits (net of all management costs) of all multiple uses
is greater than it would be without timbering.
 The cost of road building is often not included in this analysis
because it is viewed as a benefit to multiple uses.
 The problem is that the quantity of roads necessary for harvest
of timber may be greater than that optimal for recreational use,
and as a result may cause environmental degradation.
 In addition, building these roads precludes the designation of
the forest as a wilderness area.
 The cost of the roads is viewed as sunk by the Forest Service
and is not linked to the acceptance of bids for use of the forest
land.
32
Below-Cost Timber Sales
 Figure 12.7 illustrates the excess harvesting which
will result when the full costs associated with use of
the timber resource are not reflected in the decision
to harvest.
 M1 represents the square miles harvested when the
timbering firm does not recognize the cost of road
building or the other opportunity costs.
 As additional costs are added to the MPC, the
optimal quantity of timber harvested falls.
 Marginal revenue is presented as a horizontal line
because this is a small portion of the market for
timber and harvest from this forest will not impact
the price of timber in the market place.
33
34
Below-Cost Timber Sales
 Figure 12.8 illustrates a special case where
failure to recognize the full costs of
harvesting timber can lead to inefficient
harvests.
 By comparing MR to MPC plus additional
external costs it is possible to see that the
optimal level of harvest is zero.
 Failure to incorporate the other costs would
result in a positive level of harvest.
35
36
Ancient Growth Forests
 In the United States, the only remaining old growth forests are
in the Pacific Northwest and Alaska.
 Old growth or ancient forests are forests that have never been
logged and therefore, are in their original state.
 From an ecological perspective, replanted forests are a poor
substitute for an old growth forest.
 Huge trees shape the ecosystem within which they live.
 Standing trees serve as homes for many species.
 Falling trees clear a swatch through the forest, open up the
floor of forest to sunlight, and promote growth of plants.
 Deadwood provides nutrients for new generations of trees.
 Fallen trees provide homes for voles, a mouse-like species of
mammal, and the vole spreads a fungus throughout the forest
which is responsible for making soil nutrients available to
coniferous trees and facilitates their tremendous growth.
37
Ancient Growth Forests
 In addition to the direct monetary costs of timbering
old growth forests, there are also the costs to
society of the loss of the ancient forests.
 These costs are likely to be high, since the amount
of ancient forests has shrunk so drastically in recent
years.
 Current policy towards old growth forests is in a
state of flux, with many new laws being introduced
before Congress, the Endangered Species Act up for
reauthorization, and many policy decisions being
made in the federal course.
 Of particular interest are policies towards roadless
areas and fire suppression.
38
Summary
 Since the forest is the only source of economic
activity in many remote rural areas, it is often felt
that the forest must be harvested to provide jobs to
support the region's population.
 There are costs associated with "saving" jobs in the
timber industry.
 These include the inefficiency associated with road
building, the potential loss of species, for instance
the decline in salmon fishing due to destruction of
streams.
 As fewer and fewer old growth forests remain, the
cost associated with clear cutting these forests rise.
 The value of the last of any species is very great.
39