Forest and Conservation Economics- FRST 318 Harry Nelson Dept of Forest Resources Mgt.

Harry Nelson 2012 What do we study in Economics?  There are three basic questions societies ask: 1. What to produce? 2. How to produce the desired product mix? 3. How to distribute production?  Economics helps us understand how this is organized  Positive analysis and normative analysis

Harry Nelson 2012 Why does Economics get a bad rap?  Basic Concepts you learn in introductory courses:  There’s not enough to go around & you have to make choices (Scarcity)  Those choices involve tradeoffs (Opportunity cost) u Markets are the optimal way to organize all of our economic interactions (competitive markets maximize social welfare) u Everything has a monetary value

Harry Nelson 2012 Rethinking Economics  Economics historically was a branch of moral philosophy and based on logic  I prefer to think of it as making a reasoned case-drawing on a wealth of empirical observations and experience  Provides a useful set of concepts that can be used to understand these economic systems we’ve created and analyze the interaction between the different components and the way we make decisions within this framework

Harry Nelson 2012 Goal of the Course  Understanding of the basic principles and concepts  Teach you how to apply those concepts to develop an analytic structure to investigate different types of problems and issues  An understanding of the tools you can use

Harry Nelson 2012 Problem Solving Business Economics  Investment decisions  Production levels  Risk management Conservation Economics  Protecting environmental values  Risk management  Firm profitability  Net present value and IRR  Cost benefit analysis  Non-market valuation Tools for running a company Tools for making policy decisions

Harry Nelson 2012 Policy Decisions  What kind of silvicultural investments should we make?  How much forest area should be conserved or protected?  Does AAC promote sustainability?  Is bio-energy a good idea?

Harry Nelson 2012 What’s special about Conservation and Forestry Economics? The realities of forest and ecosystems challenge many of the assumptions used to build basic economic models  Many valuable but unpriced outputs  Pervasive externalities  The challenges of managing complex systems multiple outputs and at different scales

Harry Nelson 2012 What Should Our Objectives be?  We should produce goods and services in the most efficient way possible (we don’t waste)  Economic efficiency  Those goods should go to those that value them the most  Social efficiency

Harry Nelson 2012 Market Equilibrium and Social Welfare Producer Surplus Consumer Surplus P Q p* q* D S

Harry Nelson 2012 Market Equilibrium  Consumers needs are met at lowest price possible  Consumers are maximizing their satisfaction  Capital is allocated efficiently  Labor and other resources are allocated efficiently  Producers seek efficient levels of output  Land is allocated efficiently  There is no redistribution of income that will result in an increase in net benefits

Harry Nelson 2012 The Assumptions required for markets to yield social optimum  Firms and consumers are rational maximizers  Efficient property rights  Perfect competition  Free entry  Perfect information  Mobile labour and capital  No externalities  Priced inputs and outputs  Satisfactory income distribution

Harry Nelson 2012 Mathematical Expression  MSB=MSC  MRP=MFC  VMP=MRP  MFC=VMF  Marginal Social Benefit = Marginal Social Cost  Marginal Revenue Product = Marginal Factor Cost  Market value of marginal product=marginal revenue product  Marginal Factor Cost=Value Marginal Factor Setting the stage 13

Harry Nelson 2012 P Q p* q* D S q1q1 q2q2 Consumer Surplus Producer Surplus Inefficiency – Too Little Production Deadweight Loss

Harry Nelson 2012 P Q p* q* D S q1q1 q2q2 Consumer Surplus Producer Surplus Inefficiency –too much production

Harry Nelson 2012 Opportunity Cost  The value of the best alternative use of a resource  In essence, opportunity costs, and their proper consideration in decision making, should allow us to ensure that resources are directed to their best possible use.  When markets work perfectly, prices accurately reflect opportunity costs and market does it for us automatically  But when prices don’t reflect true costs, then the analysis has to take those into account to accurately calculate net gains to society

Harry Nelson 2012 Equity  The distribution of wealth and income is important too  Can be intra- personal  Can be inter- regional  Can be inter- generational  Governments can intervene to re- distribute wealth and income  Can do it directly  Can do it indirectly  Often a tradeoff between equity and efficiency (log exports; appurtenancy)

Harry Nelson

Harry Nelson 2012 World Forests country data (2010) 19 Forest Area 000 ha% of world Russia809, % Brazil519, % Canada244,5716.3% USA304,0227.5% China206,8615.1% Indonesia94,4322.3% Sweden28,2030.7% Finland22,1570.5% Malaysia20,4560.5% Chile16,2310.4% NZ8,2690.2% Canada 310, %

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Harry Nelson 2012 Forest Use 21

Harry Nelson 2012  Expenditures exceed revenues in many countries 22

Harry Nelson 2012 What is harvested (2005)  Harvest of 3.2 billion m3/yr in 2005 (flat over last 10 years)  Subsistence (45.2%) vs Industrial (54.8%)  Coniferous (1/3) vs Non-coniferous (2/3)  Missing data due to illegal, underreported, and unreported logging estimated at 10-25% of total.

Harry Nelson

Harry Nelson 2012 Public Land Model percent of forest land owned by government 25

Harry Nelson 2012 Canadian Forests  Canada was world’s largest exporter of wood products (until 2009)  Historically contributes around 3% of GDP; more important in New Brunswick, Quebec and BC  Important regional differences-E. Canada focus on Pulp & Paper, Western Canada on wood products  The US is the major export market (by far)

Harry Nelson 2012 Drivers of Change  Demand shifts-change from forests as source of forest products to forest values  Biodiversity  Carbon sequestration  Recreation and aesthetic benefit  Provision of clean water  Supply shifts-emergence of plantations  Canada is unique in how much of its harvest comes from natural forests 27

Harry Nelson 2012 Drivers of change in ecosystem services (Millennium Ecosystem Assessment, 2005) 28

Harry Nelson 2012 Observed trends in floods and wildfires (Millennium Ecosystem Assessment, 2005) 29

Harry Nelson 2012 And a future with more surprises…. 30

Harry Nelson 2012 For this week…  Read Chapters 1, 2 & 3 in Pearse  bin/catsearch?bid= bin/catsearch?bid=  In labs following in-lab assignment we will carry out review  Upcoming  Guest lecture Tuesday the 17th (Mark Boyland, CFS)