Introduction

2. Introduction • The historical emphasis of forest economics has been on how to maximize wealth to be derived from the harvesting of the forest's wood. • A contrasting viewpoint expressed by later conservationists, such as John Muir (1838-1914), was that the forest was a synergistic system and that the benefits derived from a forest were derived primarily through the preservation of the forest, although timbering of some forest land was certainly appropriate. • This chapter looks at the traditional problem of how to maximize income derived from timbering, as well as the more general problem of maximizing the total social benefits arising from the forest.

3. Forest Ecology • Temperate forests, the type found in North America are found north of the Tropic of Capricorn and south of the Tropic of Cancer. • The forest is more than a collection of trees. • It is a collection of plant, animal, bacterial, and fungal organisms that interact with the physical environment and with one another. • A forest is an example of a climax community.

4. Forest Ecology • A climax community is an ecosystem that has arisen out of competition with other communities of organisms. • An area of land may be first populated by grassland, then small woody plants, then fast growing trees, and finally slower growing trees, such as oak and maple. • The process of soil formation and nutrient cycling is a good example of how organisms interact with the physical environment.

5. Forest Ecology • Nutrient cycling refers to the process by which the basic life nutrients (phosphorus, potassium, and nitrogen) are absorbed from the physical environment by various organisms in the ecosystem, transferred from organism to organism, and eventually returned to the soil. • These nutrients return when plants die and decay, when animals eat plants and their waste is returned to soil and when other animals eat these animals and waste is returned to the soil.

6. Forest Ecology • Forests play an essential role in carbon cycling when they remove carbon dioxide from the atmosphere and sequester it in their woody tissue. • This basic building block is then available to other organisms who consume the tree. • Forests also play an important part in the hydrological cycle. • Leaves of the forest slow the velocity of the rain, allowing a slow trickle of water to organic matter below. • The result is more water absorbed by the soil, more water reaching underground aquifers and less soil erosion due to run-off.

7. Forest Ecology • Forest ecosystems are important providers of ecological services. • In addition to the forests’ contribution discussed above, forests are important to flood protection, biodiversity, soil formation, and erosion control. • Forests also provide important aesthetic and recreational benefits and production activities. • Productive activities include harvesting animals, mushrooms, berries, mining and grazing of livestock and the harvesting of wood.

8. Optimizing the Use of Forests for Harvested Wood • Want to decide how plant and how to maximize benefits from harvesting over time (consider multiple use issues later) • The length of a harvest-replant-harvest cycle is referred to as the rotation of forest. • To maximize the physical quantity of wood to harvest, want to choose the length of the rotation cycle to maximize the flow of wood. • The length of time in the rotation is critically dependent upon the way in which trees grow.

9. Maximizing the Physical Quantities of Harvested Wood • The growth of trees is dependent on the density of the stand of trees, the soil condition, weather and rainfall, and the incidence of disease and pests. • After replanting, the trees initially grow at a rapid rate, but the mass of wood is relatively small. • As trees mature growth eventually slows. • Growth can become negative as disease and death associated with aging has a greater impact. • Growth of a hypothetical stand of trees can be expressed as a function of the age of the trees in the stand.

10. Maximizing the Physical Quantities of Harvested Wood • When should a stand of trees be harvested? • Foresters have developed concept of Mean Annual Increment Mean Annual Increment = Volume/Years = Average volume • If harvest to maximize the quantity of wood over time from the stand, then want to harvest at maximum mean annual increment. • If average growth is maximized over a sequence of multiple rotations, then total growth will be maximized as well.

11. Marginal Average Growth

12. Volume of Wood Over Time Volume (cubic ft) Age

13. Volume of Wood Over Time, Maximizing Total Volume (Mean Annual Increment) Volume (cubic ft) Age A’=36.25

14. The Optimal Rotation • Should the harvest occur when MAI is at its peak? • This would maximize the total volume of wood harvested from the stand, but not necessarily the net benefits, need to consider benefits and costs • If all value of forest is in the wood harvested, then maximizing net benefits is the same as maximizing profits • Revenue is generated at harvest and is referred to as stumpage value. • The costs include planting, maintenance such as disease control, fire prevention, thinning, pruning and removal of deadwood and pest control. • The forest manager's job is to maximize the present value of this stream of costs and benefits by deciding the optimal rotation length.

15. The Optimal Rotation • Assume first that forest will be harvested and not replanted, then present value of profits is: • Where P = price of wood, c = cost of harvest, pc=planting costs, r = interest rate, and t = time of harvest

16. The Optimal Rotation • Further assume that pc=0, P (the price of wood) and c are fixed, then we plot the net value = (P-c)* Volumet • Net value will look just like biological growth curve since it is multiplied by a constant • Want to choose the point to harvest that represents the highest present value along the curve, plot “iso present value” curves Vt = PVt (1+r)t

17. Maximizing Present Value of profits Profits PV3 PV2 PV1 Age A*

18. Multiple Use Management • The Multiple Use Sustained Yield Act (MUSYA) of 1960 specifically charges the U.S. Forest Service with managing to promote benefits from both timber and non-harvest benefits. • One set of uses of forest specified by the MUSYA includes those that generate revenue for forest service such as timber, grazing, mineral and energy mining, and fee recreation. • Grazing is possible because a forest is generally defined as an area in which at least 10 percent of land area is covered by a canopy of trees. • Approximately 100 million acres of national forest land is currently available for ranchers, of which 50 percent is suitable of grazing. • Bowes and Krutilla charge that the payment made for use of this land is below market price.

19. Multiple Use Management • An alternative set of uses for the forest resource does not generate revenues and is often called nonmarket use. • These include open-access (unpriced) recreation, watershed maintenance, wilderness, and fish and wildlife value. • Not only do market and nonmarket uses conflict but also many nonmarket uses conflict with one another. • Too many recreationists can lead to environmental degradation which leads to a decline in wildlife numbers and diminished watershed attributes. • Hikers conflict with trail bikers or skiers with snowmobiles.

20. Multiple Use Management • Many critics of U.S. Forest Service policy feel that management has been slanted towards timber production. • In the late 1970s, the National Resources Defense Council focused on the existence of below cost timber sales and the inefficiencies that they create, including depressing the profitability of privately owned forests. • Below market timber sales are those sales of timbering rights on public land, where revenues do not cover the timber related forest management expenses. • When applied to forests, the theory of comparative advantage argues that even though some of the best wood in the world can be produced from old growth red wood, spruce, fir and sequoia forests in the Pacific Northwest, the comparative advantage of these forests is in the production of ecological services, aesthetic benefits and recreational opportunities.

21. Below-Cost Timber Sales • A general guideline for proper use of public forest land is that a forest should be used for timbering if the present value of the net benefits (net of all management costs) of all multiple uses is greater than it would be without timbering. • The cost of road building is often not included in this analysis because it is viewed as a benefit to multiple uses. • The problem is that the quantity of roads necessary for harvest of timber may be greater than that optimal for recreational use, and as a result may cause environmental degradation. • In addition, building these roads precludes the designation of the forest as a wilderness area. • The cost of the roads is viewed as sunk by the Forest Service and is not linked to the acceptance of bids for use of the forest land.

22. Below-Cost Timber Sales • Figure 12.7 illustrates the excess harvesting which will result when the full costs associated with use of the timber resource are not reflected in the decision to harvest. • M1 represents the square miles harvested when the timbering firm does not recognize the cost of road building or the other opportunity costs. • As additional costs are added to the MPC, the optimal quantity of timber harvested falls. • Marginal revenue is presented as a horizontal line because this is a small portion of the market for timber and harvest from this forest will not impact the price of timber in the market place.

24. Below-Cost Timber Sales • Figure 12.8 illustrates a special case where failure to recognize the full costs of harvesting timber can lead to inefficient harvests. • By comparing MR to MPC plus additional external costs it is possible to see that the optimal level of harvest is zero. • Failure to incorporate the other costs would result in a positive level of harvest.