Download FOR 451 ( FOREST RESOURCE ECONOMICS & QUANTITATIVE

FOR 451 ( FOREST RESOURCE
ECONOMICS & QUANTITATIVE ANALYSIS)
FORESTRY AND THE FREE MARKET
Chapter 3 (Klemperer, 1996)
Forestry and the Free Market
• US forestry economy: Mixed ownership
– private forests often under public regulations
– public forest use dictated by private citizens
• Big Q: How much government intervention in private forestry is needed
in market economy?
• If government intervenes (to improve social welfare): what kind of
intervention, how much, when and where?
Forestry and the Free Market
• Social objective (in using resources): to achieve a welfare maximum.
• Welfare maximum - elusive resource allocation, such that no
reallocation could yield net gain
• If no change can bring net gains – at welfare maximum!
Forestry and the Free Market (continued)
Other theories on maximization of welfare:
• Pareto Optimum -- no resource allocation could make anyone
better off without making someone else worse off (1848-1923)
– More restrictive, narrow view
• Compensation principle -- allow resource reallocation, only
when gains > losses, i.e., gainers could overcompensate losers
(Kaldor, 1939)
Required conditions for free market to
maximize welfare
1. Property rights to resources enforced -- clear definition of land and
resource ownership
2. Firms & consumers are maximizers – they are rational
3. Perfect competition -- firms are price takers
4. Free entry of firms -- no barriers to entry to industry
5. Perfect information
6. Mobility of labor and capital
7. No unpriced negative side effects -- producers should pay for all costs
8. Priced inputs and outputs - all resources/outputs have a price
9. Satisfactory income distribution -- current/future income distrib. is ok
Results when welfare is maximized
1. Consumers' needs are met
2. Consumers maximize their satisfaction (apply equimarginal principle)
3. Efficient capital allocation -- best alternative rate of return to capital
4. Efficient allocation of labor & other resources -- move to highest returns
5. Producers have efficient levels of output -- optimal output level (max NR
at MC=MR=P)
6. Efficient allocation of land -- most desirable use of land
7. No redistribution of income could yield any net benefit -- if redistributed,
losses > benefits.
Market Failures & Government Actions
1. Property rights not enforced
- fish & game laws, licenses, fees, other forms of “rationing”
2. Imperfect competition (monopoly/monopsony, oligopoly/oligopsony)
- Sherman Act of 1890, Clayton Act of 1914,
3. Imperfect information
- Truth in Advertising Act
4. Immobility of labor and capital
- retraining programs, unemployment insurance, relocation assistance
5. Unpriced negative side effects (“negative” externalities, or “external
diseconomies”)
- ex: with pollution  Social Optimum < Private Optimum
- emission standards, tax incentives, direct payments for control measures,
public funded programs
Social Marginal Cost
Private Marginal Cost
Pollution cost/ton of paper
$/ton
Marginal Revenue = price/ton
0
Qs
Social Optimum
Qp
Tons of paper produced per year
Private Optimum
Fig. 3-3. Divergence between the private and social optimum with water pollution.
Market Failures & Government Actions
6. Outputs not easily priced
- Public goods vs Private goods vs Mixed goods
- “Positive” externalities (unmarketed positive by-products)
 Social MR > Private MR
 Social Optimum > Private Optimum
- Option demand, Existence demand, Bequest value
- Actions: tax incentives/subsidies for providing unpriced goods
(public goods), education programs about conservation
practices, taxes/fines to discourage certain types of
environmental damage, regulation of private forests,
government ownership
Private MC/acre
Open space benefits, $/ac
$/acre
Social MR/acre
Private MR/acre
0
Qp
Private Optimum
Qs
Acres forested near the city
Social Optimum
Fig. 3-4. Private and social optimum with unpriced positive side effects.
Market Failures & Government Actions
7. Economic instability
- programs for price stabilization and support (subsidies)
- monetary & fiscal policies (stimulate investment, stabilize interest
rates, dampen/stimulate demand)
8. Unsatisfactory income distribution
- progressive income taxation, programs like food stamps, welfare, free
public services, assistance to low income students, low-income
housing subsidies, social security
9. Other market failures?
- list provided not all-inclusive
- market failure is major justification for government intervention
- need to document market failure before government action
Optimal levels of environmental damage
Non-Market, Environmental Econ:
2 Approaches or Damage Liability Rules:
1. Victim liability
2. Damager liability
Damagers -- those causing damage
Victims -- those harmed by damage
Optimal level of environmental damage?
Optimal levels of environmental damage
1. Victim liability -- with damage allowed, place liability on victims for
damage reduction; determine their WTP cost of damage reductions
- Stresses private property rights (individual's right to do what they
wish with their property)
2. Damager liability -- no uncompensated damage allowed, place liability
on damager to compensate victims.
- Compensation will be minimum $ payment that victims require to
willingly endure damage. With compensated damage, victims would
just be as satisfied as they were before damage occurred.
•
- Stresses amenity rights or public's right to enjoy amenities (clean
air/water, peace & quiet)
Optimal Solutions with Monetary Damages
(Coase Theorem)
• Use of bargaining framework to reach “optimal” environmental
damage levels
• Payments need not actually be made; need to only show that if
payments were made, gains > costs
• Assumption: the only damage is reduced income to victims
Optimal Solutions with Monetary Damages
• Use of bargaining framework to reach “optimal” environmental
damage levels
• Figure 3-5a. Environmental damage costs and firm’s profit
Optimal Solutions with Monetary Damages
A. Victim Liability –Bargaining framework -- see Figure 3-5b
Optimal Solutions with Monetary Damages
B. Damager Liability –Bargaining framework -- see Figure 3-6
Optimal Solutions with Monetary Damages
Optimal Solutions with Nonmonetary Damages – see Figure 3-7
Optimal Solutions with Monetary Damages
Use of the Declining Marginal Utility of Money
- Most rich folks  added amount of $ today brings less
satisfaction than same amount did when their income was much
lower (empirical studies)
WTS > WTP :
- People’s required compensation (WTS) when losing a
nonmarket amenity exceeds their WTP to attain it or save it from
damage (studies)
- Other factors influence this situation, e.g., people hate to give
up what they already have!
Optimal Solutions …
• Damage Fines
• Transactions Costs
• Income Effects
• Placing Liability for Damage Reduction on
– On Victims
– On Damagers
• Changing Attitudes
• Avoiding Polarization
Applications in Forestry – p.92
Forestry Applications
Table 3-1. Examples of forestry-caused environmental damage
Figure 3-9. Optimum damage from logging.