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FOREST ECONOMICS (FWM 302)
Definition of Economics Economics, social science concerned with the production, distribution, exchange, and consumption of goods and services. Economists focus on the way in which individuals, groups, business enterprises, and governments seek to achieve efficiently any economic objective they select. Other fields of study also contribute to this knowledge: Psychology and ethics try to explain how objectives are formed; history records changes in human objectives; sociology interprets human behaviour in social contexts. Standard economics can be divided into two major fields. The first, price theory or microeconomics, explains how the interplay of supply and demand in competitive markets creates a multitude of individual prices, wage rates, profit margins, and rental changes. Microeconomics assumes that people behave rationally. Consumers try to spend their income in ways that give them as much pleasure as possible. As economists say, they maximize utility. For their part, entrepreneurs seek as much profit as they can extract from their operations. The second field, macroeconomics, deals with modern explanations of national income and employment. Macroeconomics dates from the book, The General Theory of Employment, Interest, and Money (1935), by the British economist John Maynard Keynes. His explanation of prosperity and depression centres on the total or aggregate demand for goods and services by consumers, business investors, and governments. Because, according to Keynes, inadequate aggregate demand increases unemployment, the indicated cure is either more investment by businesses or more spending and consequently larger budget deficits by government. Economics is a social science that studies how society chooses to allocate its scarce resources, which have alternative uses, to provide goods and services for present and future consumption. The definition starts “Economics is,” and that is what is being defined. So the remaining words need to be understood to make sense of economics. Let us start with “goods and services”. Goods and Services What exactly are goods and services? A good is anything that satisfies a want. That is the purpose of production — to provide goods that satisfy wants. So goods are produced, and the consumption of those goods satisfies wants. Goods can be tangible or intangible. Tangible goods are physical items such as bulldozers or pizzas. Intangible goods such as medical care or education are called services. Both goods and services satisfy wants and therefore can be called goods. Forest goods and Services Forest goods refer to the products that are tangible and physical objects of biological origin such as plants, animals and their products. Forest Services are the needs of the public and Society that forest provides, that is either organised by government or a private company e.g ecotourism, grazing, bioprospecting (pursuit of plant- derived chemicals for pharmaceuticals) and some other forest benefits which include soil conservation, soil fertility, watershed protection e. t.c. Resources The satisfaction of wants can only be accomplished by using up resources , the inputs, the so-called factors of production or means of production. These resources can be classified as land, labour, capital, and entrepreneurship.
Scarcity Resources are scarce. Scarcity is a relationship between how much there is of something and how much of it is wanted. Resources are scarce compared to all of the uses we have for them. If we want to use more than there is of an item, it is scarce. Note that this meaning is different from the usual meaning of scarce, which is “rarely found in nature.” How are they different? Consider this example. Is water scarce? How could anyone argue that water is scarce in the usual sense? Water covers nearly two-thirds of the earth’s surface. Yet an economist would say that water is scarce. Why? The reason is that there are so many competing uses for water that more water is wanted than is available. If you find this hard to believe, ask farmers and ranchers in the West, where water rights are jealously guarded. As soon as someone is willing to pay for a good, or a resource, it is scarce by the economist’s definition. Consider scarcity from another point of view. What if scarcity did not exist? Then all goods would be free goods. Scarcity Unlimited wants alone are not a problem, but certainly a problem exists, when unlimited wants are combined with a limited means of satisfying those wants. The production of any good on our wish list, uses up resources. Then scarcity sets in. We can never satisfy all of society’s unlimited wants with limited resources and the consequently limited goods. Unlimited wants reflect human nature. The limitation of resources is imposed upon us by nature. Therefore, unlimited wants competing for limited resources creates the basic economic problem of scarcity. This is a difficulty that cannot be overcome by cleverness or good fortune. Scarcity, the interaction of unlimited wants with limited resources, has been called the economic problem. In fact, you are starting the study of economics, which would not exist except for scarcity. If that makes you think that scarcity might be the cause of many of your problems, you are right. Scarcity is the economic problem. Therefore, choices must be made. Choices We must choose how to use our scarce resources. Scarcity forces choice. And economics, which deals with scarcity, is often called the study of choosing. We cannot have all we want of everything we want. Scarcity is imposed by limited factors of production yielding limited output of goods relative to unlimited wants. Choices must be made. Now you see that since we do not have enough capital goods to assist in the production of all those consumer goods to satisfy our unlimited wants, capital is a scarce resource. And we must choose how to use capital. For similar reasons, we must choose how to use land, labour, and entrepreneurship. The fact that choices must be made in turn reflects the fact that scarcity does exist. Alternative Uses So far we see that society is faced with the problem of not having enough resources to provide for all wants. And thus choices must be made about how those resources will be used or allocated. Allocate means distribute. Society must make choices among the alternatives. Society must decide which goods will be produced, how to allocate resources to produce goods, and how to allocate the goods among the population. The method used to decide how these allocations will be made depends on the kind of economic system the society has chosen. Since resources have alternative uses and are scarce, it is necessary to choose among the alternatives. Land, labour, capital, and entrepreneurship may be used in one combination to produce exactly what is most important to us at a given time. There are many alternative ways to use the resources, and choices must be made. It makes no difference whether the problem is how government will use its resources or how individuals or business use theirs. In every case, resources are scarce, and choices must be made. There are alternative ways that this problem of “scarce” could be solved. We must choose among alternatives. Scarcity imposes a limitation on the amount of output that society can produce. Because there are always alternative uses of the resources and because scarcity exists, society cannot produce all that it wants. It must therefore choose among the alternatives. Hence cost is imposed on society; economists call this cost opportunity cost. What is opportunity cost?
purchased by consumers, it is a consumer good; if it is to be used to produce other goods and purchased by business, it is a capital good. Entrepreneurship or Management is human effort again. Entrepreneurs are the risk takers. They are more than managers, although they use managerial ability. Entrepreneurs reap the profits or bear the losses of their undertakings. Entrepreneurship is the organizational force that combines the other factors of production — land, labour, and capital — and transforms them into the desired output. The output may be capital or consumer goods, but ultimately consumer goods are produced to satisfy wants. Supply and demand Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand. The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible. How? Let us take a closer look at the law of demand and the law of supply. A. The Law of Demand The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The chart below shows that the curve is a downward slope. A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantities demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the
more the good will be in demand (C). B. The Law of Supply Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at higher price increases revenue. A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantities supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on. Time and Supply Unlike the demand relationship, however, the supply relationship is a factor of time. Time is important to supply because suppliers must, but cannot always, react quickly to a change in demand or price. So it is important to try and determine whether a price change that is caused by demand will be temporary or permanent. Let's say there's a sudden increase in the demand and price for umbrellas in an unexpected rainy season; suppliers may simply accommodate demand by using their production equipment more intensively. If, however, there is a climate change, and the population will need umbrellas year-round, the change in demand and price will be expected to be long term; suppliers will have to change their equipment and production facilities in order to meet the long-term levels of demand. C. Equilibrium When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.
consumers want the good while producers are not making enough of it. In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium. Factors affecting Demand If price only changes, the demand curve for a good or service will not shift. Instead, there will be a movement along the demand curve. If price rises, demand will contract ; less will be purchased in a given period of time. If price falls, demand will expand , and more will be bought in a given period of time. The demand curve will shift to the left or right, if other factors, other from price, change. What are these other factors? There are many, but some include Changes in income. An increase in household income will see demand increasing (a shift of the curve to the right). Usually, this is associated with an increase in the price of the good or service being consumed. Changes in the prices of substitutes. If the price of a substitute falls, then demand for the good or service will also fall (or contract , to use the correct terminology). Changes in the prices of complements. If the price of a complement rises, then the demand for the good or service will fall (or '' contract ''). Changes in the size and age distribution of the general population. As Australia's population is rapidly aging (as a result of smaller numbers of children per family), demand for many goods and services demanded by older people has risen. For example, in the building industry, there has been an increase in demand for retirement homes, and ''medium density'' housing. Advertising and changes in fashion can have a market effect on demand. Indeed, producers of goods that are close substitutes generally spend large amounts on advertising, reminding consumers that their product is ''better'' than the opposition's product. (Whether or not this is reality true, of course is another matter).
Seasonal changes. For example, demand for ice-creams rises in warmer weather, and falls in the colder months of the year. Changes in technology. Firms are constantly attempting to gain greater sales through improvements in the quality and features of their product. This is seen clearly in the computer market. The introduction of a new personal computer with a bigger memory chip or a faster operating speed soon results in prices of older model computers rapidly falling. Consumer expectations also affect demand. People tend to maintain high levels of consumption when they feel confident about their continuing employment in the future. If people, for whatever reason, feel less confident about the future, they tend to decrease consumption and increase saving. If households believe that inflation will rise in the future, or that government taxes will rise, they will increase their demand for many goods and services, to ''beat'' the price rise. Factors Affecting Supply Economic factors affecting the supply of forest biomass include production costs, prices of biomass and its substitutes, competing uses of forest resources, and policy, among others. First, technologies for forest production, biomass harvest and transport, and energy conversion will dictate the production costs of forest biomass and bioenergy. Thus, research and development will have an important role to play in forest biomass and bioenergy development. The costs will also vary with scale of operation, biomass spatial density, terrain conditions, average stem diamater, and transport distance, among other things. The most cost-effective production of biomass for energy occurs when it is produced simultaneously with other higher valued forest products (sawlogs, pulping chips). Second, there also must be a demand for (buyers of) forest biomass in local markets, which interacts with the supply to determine the market price. Though there are some local buyers in limited locations currently, large buyers have not emerged region-wide. Potential buyers include independent developers, utility companies, bio- refineries, larger-scale users of biomass for space heating and chilling, and the producers of other bio-based products in the future. Third, prices of other types of energy such as fossil fuels will have an influence on the supply of forest biomass. Increases in the price of oil or natural gas will favor bio-energy. Forest bio-energy will also face competition with other renewable energy sources such as agricultural crops and crop residues, solar, wind, and hydro energy, among others.
The Producer's Expectations It doesn't just matter what is currently going on - one's expectations can also affect how much of a product one is willing and able to sell. For example, if your firm produces mp3 players and you hear that Apple will soon introduce a new iPod that has more memory and longer battery life, you (and other producers) may decide to hurry up and sell your players to stores before the new iPod comes out. When people decide to increase production/sales today, they are increasing the current supply for mp3 players because of what they EXPECT to happen in the future. The Number of Producers in the Market As more or fewer producers enter the market this has a direct effect on the amount of a product that producers (in general) are willing and able to sell. More competition usually means a reduction in supply, while less competition gives the producer an opportunity to have a bigger market share with a larger supply. ELASTICITY Elasticity is a measure of responsiveness. For example, an economist may like to know how the quantity demanded for oil will be impacted by a 10 percent price increase. In other words, the economist is looking at how responsive the quantity demanded is to a change in price. Measuring and understanding elasticity is a very important skill that economists use when advising policy makers on the impact of establishing a new tax, or removing a current one, on the market. Also, firms can gain valuable insight on how increasing or decreasing their price will affect total revenue. The three basic categories we will focus on are price elasticity, income elasticity, and cross price elasticity. We will also take a look at elasticity in practice with its relationship to taxes. Price Elasticity Price Elasticity of demand or supply gives economists and business owner’s exact measures of the quantity response to a change in price. In other words, the measure tells us exactly how much the quantity supplied or demanded changes as a result of a change in the price. For this reason, price elasticity is the most commonly used elasticity concept. The price elasticity of demand measures the responsiveness of quantity demanded due to a change in price. E = % change in qty demanded % change in price
The price elasticity of supply measures the responsiveness of quantity supplied due to a change in price. E = % change in qty supplied % change in price Example: Suppose the quantity supplied of chopsticks increases by 4% and the price increases by 6%. Calculate the Elasticity of Supply as follows... E = 4/6 =. Example: Suppose the price of particle board increase by 15% and the quantity demanded decreases by 1.5%. Calculate the Elasticity of Demand as... E = - 1.5/15 = -. CHARACTERISING ELASTICITY Elastic (E>1). We say that a good is (price) elastic when we find the elasticity to be greater than 1. Quantity demanded or supplied responds quite a bit to a change in price. We typically look at goods that have elastic demand or supply curves as ones with many substitutes. Typically, we see particle board and fibre board as substitutes. For example, if the price of particle board were to increase, people are more likely to purchase fibre board. We can say that consumers are basically indifferent between the two products; this makes consumers sensitive to the price. Inelastic (E<1). We say that a good is (price) inelastic if we find the elasticity to be less than 1. Quantity supplied or demanded is not very responsive to a change in price. Unit Elastic (E=1). A good is unit elastic if we calculate the elasticity to be equal to 1. Perfectly Elastic (E= ). The quantity supplied or demanded responds a great deal to a change in price. This is characterized by a horizontal line on a graph. A perfectly elastic good implies easily accessible substitutes and perfect information. In other words, if the price of a particular good increases, no units will be bought. For example, consider two nearly identical brands of wood
Luxury Good (E>1). These are goods whose consumption increases an amount larger than an increase in income.
- An example of a luxury good is a round of golf. With low income, your consumption of rounds of golf will likely be zero. However, once your income rises enough to afford to play, your increase in rounds of golf will probably be higher than the increase in income. In other words, once you make enough money to play the first round of golf, your increase in round of golf consumption will be 100 percent while the increase in income may have only been 15 percent. Inferior Good (E<0). These are goods whose consumption decreases with an increase in income.
- A classic example of an inferior good is Ramen Noodles. The idea here is that you will consume fewer Ramen Noodles as your income increases. For example, after you graduate from college, you may have higher quality (more expensive) Chinese takeout instead of Ramen Noodles for some of those quick, late night, meals. Cross Price Elasticity Economists may like to know how responsive/elastic the quantity demanded for a good is in response to a change in the price of another good. For example, if the price of CD players decreases, what will happen to the quantity demanded for CDs? Well, we can imagine that more CDs will be bought/demanded to go along with people's CD players. By calculating cross-price elasticity, we can measure the responsiveness and determine if the goods are substitutes, compliments, or not related to each other. The cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good when compared with a change in the price of another good. E = change in quantity demanded of good A change in price of good B
Characterizing Cross-Price Elasticity Substitutes (E>0). Are goods that can be used in exchange for one another. For instance, if the price of Pepsi were to increase, the demand for Coca Cola would increase because people generally see these two goods as substitutes for one another. Compliments (E<0). Are goods that people tend to consume hand in hand. For example, if the price of hamburger meat increases, the demand for American Cheese will decrease. This is because people commonly use American Cheese to make cheeseburgers. Independent (E=0). These are goods that show no relationship. An example of independent goods is Halloween costumes and marble flooring. DIMINISHING RETURNS The Short Run and Variable Inputs The first step toward understanding the law of diminishing returns is to recognize when the law applies. The major consideration is the time period. The short-run period of time is the only time period in which the law operates. You will soon realize that diminishing returns cannot be avoided in the short run. The short run must be carefully distinguished from the long run. The short run is a period of time in which at least one of the factors of production is fixed. The fixed factors of production, as the name indicates, are the inputs that cannot be increased during the short- run productive process. These inputs cannot be increased in number to produce more of a good during the short run. However, the variable factors of production, or variable inputs, are those inputs that can be increased during production. All inputs, both fixed and variable, are the familiar scarce resources — land, labour, capital, and entrepreneurship. Each productive process uses variable inputs in combination with at least one fixed input in the short run. A productive process uses inputs and transforms them into output, some consumer or capital good. The mowing of the family lawn is itself a productive process, contrary to the opinion of many of those who must mow. There are inputs, both variable and fixed, and the output is a mowed lawn — a consumer good. The variable inputs — labour, mower, and gasoline — can be increased. The size of the lawn is a fixed factor. The existence of a fixed factor always identifies a short-run productive process. Land is usually a fixed factor for a farmer. At the time the farmer ploughs and plants, there is a limited amount of land available. More tractors, more seed, more fertilizer can always be added, but only to a fixed amount of land. You might suggest that the farmer obtain more land by purchasing an adjoining farm. But if this addition to the farmer’s land occurs, the time period haschanged. If land is no longer a fixed factor, then all the inputs are variable. This fits the description of the long run. The long run is a period of time in which all inputs to the productive process are variable. Recognize that the critical distinction between the short and the long run is that only in the short-run are there fixed factors. Total and Marginal Product Product is the output that is produced. Product, output, and returns are terms that are often interchanged.
- and use of the forest for outdoor recreation. Although " multiple use " may not be a customary term everywhere, the practice of multiple use has been long established in some intensively managed forests of other countries. As FAO noted, management of land to serve as many uses as possible is everywhere becoming more essential. When there is abundance of natural resources and few people, there is little need for multiple purpose land use. But when increasingly large numbers of people must rely on an unchanging or diminishing resource base, they must make the most effective use of the resources they have. Multiple use of renewable land resources thus is a necessity born of scarcity of resources and abundance of people who need these resources. Competition for the use of land is growing throughout the world. This competition will not decrease but will increase as world population increases. World population is now about 3,000 million persons. It has increased as much in the last two decades as was the total growth of population up to the year 1750. To these basic necessities of life we must add today our dependence on natural resources for all the raw materials of industry. The history of mankind is the history of man's competition for land, of man's struggle to obtain adequate natural resources - and of man's over-utilization of resources. The wise use of forest lands, however, cannot be considered in a vacuum. It must be considered in relation ship to the fullest possible yield of all the products and services that forest land provides for people. In past years many of us have thought that we had enough land in forest in the to meet all foreseeable needs for wood and other products and services of forest lands. Today we are not so sure. We think our earlier estimates were too conservative. We are now genuinely concerned. Much forest land is being taken for other uses. Competition for land is becoming intense everywhere. For example, wherever you may travel in this country you will see great expansion of urban areas. This is taking land which heretofore was included in our estimates of available forest area. Superhighways, new airports, transmission lines for electrical power, oil, and natural gas, and construction of dams and reservoirs are taking many millions of acres of forest land. Forest land will continue to be taken for national defence purposes. Large pressures are developing to set aside additional forest lands exclusively for recreational use. Conversion of land from forest to food production, inevitable in the next few decades, will include substantial portions of our most productive forest land. Use of forest land for these several purposes is nothing new. In every country and for centuries forest land has been so used. What is now is the rapidly growing awareness of the need to apply multiple-use management more widely and more intensively. This comes not only from the obvious need to make forest lands more fully useful to the people but also to lessen the pressures to divert forest lands from a combination of uses to some one exclusive use. In most instances, forest land is not fully serving the people if it is used exclusively for a purpose which could also be achieved in combination with several other uses. Multiple use of forest lands in the United States did not spring into full flower overnight. While the term has become commonplace only in the last two decades, the practice of multiple use in the United States goes back to the origin of the national forests, more than half a century ago. National forest policies from the very first have emphasized resource use. The first Forest Service manual, significantly termed the " use book," recognized a multiplicity of uses. Even before this, the Forest Service had been instructed by the Secretary of Agriculture that national forest land was to be devoted to its most productive use for the permanent good of the whole people, that all of the resources were for use, and that decisions would always be made, from the standpoint of the greatest
good of the greatest number in the long run. These instructions have constituted Forest Service doctrine from the beginning. They are the genesis of multiple use. An essential of multiple use is positive, affirmative management of the several uses involved. Haphazard occurrence of these uses on some particular tract of land does not constitute multiple-use management. Multiple use is not a passive practice. On the contrary, it is the deliberate and carefully planned integration of various uses so that these will interfere with each other as little as possible and will supplement each other as much as possible. Multiple use is by no means an assemblage of single uses. It requires conscious, co-ordinated management of the various renewable resources, each with the other, without impairment of the productivity of the land. Multiple use must be over a period long enough to experience the cycle of the seasons, that is, a year or more. It does not require that all uses involved be practiced simultaneously at the same instant. Size of area is a key factor in multiple-use management. Application must be to areas large enough to give sufficient latitude for periodic adjustments in use to conform to changing needs and conditions. On the national forests, we normally think in terms of our smallest administrative units, which at, present average about 200, acres. On large private holdings similar acreages might be applicable, but for small private ownerships the unit areas would, of course, be much smaller. They might be as small as 40 acres. Multiple-use management of the renewable surface resources obviously requires control of all uses on the same land by one authority. Such management is not possible if several coordinate authorities are each trying to direct. Multiple-use management as we practice it on the national forests requires us to consider all of the five basic renewable resources, although on any specific area we may not have all of them in operation at any one time. It obliges us to co-ordinate these various uses even though doing this results in less than fullest possible productivity of some uses. The requirement for sustained yield applies to all renewable resources and is aimed both at getting a high level of productivity and at preventing over-use of any resource or impairment of productivity of the land. Multiple use is not a panacea. It has limitations, but it also has overriding advantages. DISTINCT MERITS First of all, multiple - use helps to overcome problems of scarcity. It tends to reduce or resolve conflicts of interest and competition for resources. It promotes balance in resource use. It impedes the ascendancy of single-interest pressures. Properly applied, Multiple use involves consideration of both aesthetic and economic criteria in arriving at management decisions. It offers balance between materialistic and non-materialistic values. Multiple use properly understood and properly applied is now, and will continue to be, the best management for most of the publicly owned forest lands. It will gradually become the best management for many of the large private holdings. It will always have less applicability to smaller private properties, but many of these owners will in time find it to their own beat interest to practice some degree of multiple use. Finally, the overwhelming advantage of multiple-use is that through it foresters can make forest lands contribute their utmost to society. The basic purpose of forest conservation is a social one to satisfy the intangible as well as
generally used is money. This leads to difficulties in establishing the worth of "unpriced values" such as scenery, clean air and personal happiness. In a natural resources management context, cost benefit analysis involves subtracting the monetary costs of a development from the monetary value of all the benefits generated by the same development to obtain a net monetary benefit or cost for the proposed activity. "Benefits" or "costs" for various management or land use options for a particular area can be compared. Usually the method with the highest monetary benefit is selected by decision makers There are also three modes of cost–benefit analysis. Financial cost–benefit analysis considers benefit as revenue, and cost as expenditure, for the agency responsible for a project or programme, and possibly also for other economic agents involved in its implementation. Economic cost–benefit analysis considers in addition benefits and costs which lie outside the market and accrue to all stakeholders, usually through the medium of willingness to pay. It also accepts that market prices are not necessarily an accurate reflection of opportunity costs of resources, and that environmental and social costs outside the market are appropriately measured as willingness to accept compensation for bearing them. Social cost–benefit analysis is a term much misunderstood at present. In its classical form, evolved in the 1960s and 1970s, its focus was not on products and resources, but on gains and losses to stakeholders. It was more often practised in the conditions of developing countries than in the UK. Those unfamiliar with the evolution of cost– benefit analysis often assume that social cost–benefit analysis means “cost–benefit analysis applied to social projects”, but the distinctiveness lies in the approach, not the subject to which it is applied. The terms “environmental” and “extended” cost–benefit analysis are both redundant: cost– benefit analysis’s scope in principle includes all costs and benefits anyway. Within a classical decision-making structure –
- Setting objectives
- Defining alternatives
- Enumeration
- Valuation
- Synthesis
- Decision-taking
- Monitoring/ex post evaluation Cost–benefit analysis concerns itself most with the stages of valuation and synthesis. Over the past few decades numerous techniques for evaluating non-market benefits and costs have formed the focus for efforts in developing cost–benefit analysis. There remains much disagreement on the relative merits and even validity of different techniques. METHODS OF VALUING NON-MARKET COSTS AND BENEFITS 1 Marketable benefits are created or lost elsewhere in the economy as a result of externalities. 2 Financial costs are saved, imposed, or voluntarily undertaken elsewhere in the economy. 3 Comparable products are marketed elsewhere in the economy. 4 Voluntary subscriptions are made to related causes or campaigns. 5 Consumers/clients are asked what they would be willing to pay for a product, or what compensation they would accept for suffering a “bad” (this is the popular contingent valuation method). 6 Decision makers or experts ask themselves the same questions as in 5 above, or get a “feel” for acceptable answers. 7 The costs (including opportunity costs) of past decisions made to favour non-market benefits, or abate non- market costs, are taken as a measure of presumed benefit, or cost. 8 Willingness to pay for market goods which give access to non-market goods is measured. Synthesis involves aggregating on the four dimensions implied in the definition: benefits and costs from different goods or for different resources, to different stakeholders, over different time periods, and across different scenarios. Great and ongoing debate attends each dimension of aggregation.
The following account is not about cost–benefit analysis of forestry, but about the difference between different types of forestry: the three versions of continuous cover forestry described, with clear felling or rotational forestry as the baseline, or “do-nothing”, or “business-as-usual” alternative, against which the versions of continuous cover forestry are compared. There is no attempt to present a particular and detailed cost–benefit analysis of an individual forest as it might be managed for either continuous cover forestry or for rotational forestry: such a study if properly conducted would be very time-consuming. Instead, relevant factors are raised and indicative figures are given for the kind of differences that might be found, with illustrations where appropriate from individual cases.
. ETHICS OF ANALYSIS A cost benefit analysis is based on a framework of assumptions and decisions. An analysis is a model of the interaction of economic, social and ecological factors in a study area. As with all models, a cost benefit analysis is only as good as the skill of the modellers, and reflects their personal biases and viewpoints. The combination of personal and/or institutional viewpoints which shape a cost benefit analysis model can be termed the "ethic" of the analysis. Persons with a conserver ethic will tend to produce an analysis which places high value on the protection and the ecologically responsible use of natural and social resources. Diversity within biological and social/economic communities will be stressed. The community will often be "locally" defined, e.g. local town or region. A person with a short term profit/technology ethic will be influenced by an economic principle which states "dollars gained today are more valuable than dollars obtained tomorrow". Such an approach relies upon the belief that technology will overcome any social or biological/ecological problems which arise from human actions. The community is often defined as local town or region plus Vancouver or all of British Columbia. These two hypothetical people/analysts would likely come to different conclusions given identical information. VALUATION - MONETARY AND UNPRICED VALUES Cost benefit analyses usually use monetary criteria to evaluate all considerations. This approach works well in traditional economic analysis where most factors can be easily quantified. For example an analysis of timber extraction can assign dollar values to logging costs, regeneration costs, soil degradation costs, log values, and commodity values. However, when unpriced values are considered, the practice of valuing all inputs to a cost benefit analysis in monetary terms becomes unworkable. Factors with unpriced values include wilderness areas, pleasant views, pure water, spiritual values, cultural traditions, diverse gene pools and functioning ecosystems. Economists agree that these unpriced values have worth. However, their monetary value is difficult or impossible to establish, and these values are very open to personal interpretation. The ethics of the analyst will have a large impact on the results of the cost benefit analysis when unpriced values are present in the study area. A conserver ethic will use unpriced values to offset or reduce short-term gains from developments which degrade these values. A short-term profit/technology ethic will largely ignore unpriced values, rationalize that technology can replace or repair damage to such values, and/or argue that similar “substitute” values can be found in other locations. DISCOUNTING Discounting is the process which cost–benefit analysis uses to aggregate different time periods. It has been one of the most controversial aspects of cost–benefit analysis (Price, 1993). Its influence is pervasive in forestry and environmental economics. In evaluation of continuous cover forestry it has three particular influences, on:
- Short-term costs during transformation versus long-term benefits – particularly if a better timber assortment can be obtained – once in place;
- Short-term advantages of economic thinning versus possible long-term dysgenic effects;
- Short-term costs versus slow-in-developing environmental values. TIMEFRAME AND DISCOUNTING
