Economic Parameters of Deforestation

Abstract

In theory, economic instruments should overcome the market failures that lead to excessive deforestation. Secure property rights could be established and enforced to eliminate the open access problem. In practice, the size of the welfare loss that arises from market failures in the forest sector in the absence of such first-best policies is determined by the incentives, prices, and policies faced by those who make decisions about land use. In many cases, the effects of policies on deforestation are not straightforward. For example, there are conflicting views on whether an increase in the price of logs leads to an increase or a decrease in deforestation. The effect of a change in the price of logs has particular relevance for the controversial debate about the effect on deforestation of a ban on log exports or other trade restrictions that lower the domestic price of logs. This article provides an analytical framework for determining the effects of changes in economic policies and parameters on deforestation. It models dynamic, profitmaximizing land-use choices and obtains unambiguous comparative static results by distinguishing between unmanaged and managed forests. The results suggest that measures to reduce the producer price of logs could be a second-best policy to reduce the pressures on the frontiers of unmanaged forests and to protect biodiversity.