Forest and Conservation Economics-FRST 318
Harry NelsonDept of Forest Resources Mgt.
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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
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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) Markets are the optimal way to organize all of
our economic interactions (competitive markets maximize social welfare)
Everything has a monetary value
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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
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Goal of the CourseUnderstanding of the basic principles
and conceptsTeach 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
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Problem SolvingBusiness 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 acompany
Tools for makingpolicy decisions
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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?
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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
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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
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Market Equilibrium and Social Welfare
ProducerSurplus
ConsumerSurplus
P
Q
p*
q*
D
S
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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
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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
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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
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P
Q
p*
q*
D
S
q1 q2
Consumer Surplus
Producer Surplus
Inefficiency – Too Little Production
Deadweight Loss
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P
Q
p*
q*
D
S
q1 q2
Consumer Surplus
Producer Surplus
Inefficiency –too much production
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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
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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)
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World Forests country data (2010)19
Forest Area 000 ha % of world
Russia 809,090 20.1%
Brazil 519,522 12.9%
Canada 244,571 6.3%
USA 304,022 7.5%
China 206,861 5.1%
Indonesia 94,432 2.3%
Sweden 28,203 0.7%
Finland 22,157 0.5%
Malaysia 20,456 0.5%
Chile 16,231 0.4%
NZ 8,269 0.2%
Canada 310,134 7.7%
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Forest Use21
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Expenditures exceed revenues in many countries
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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.
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Public Land Modelpercent of forest land owned by government
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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
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Drivers of change in ecosystem services(Millennium Ecosystem Assessment, 2005)
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Observed trends in
floods and wildfires
(Millennium Ecosystem
Assessment, 2005)
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And a future with more surprises….
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For this week… Read Chapters 1, 2 & 3 in Pearse http://resolve.library.ubc.ca/cgi-bin/catse
arch?bid=3922064 In labs following in-lab assignment we will
carry out review Upcoming
Guest lecture Tuesday the 17th (Mark Boyland, CFS)