Chapter 3: Markets, Governments, and Forest Resources

1. Chapter 3: Markets, Governments, and Forest Resources Text: Cubbage et al., 1992

2. Questions: Should forests be under public/gov’t control/ownership? Who can best determine the allocation & distribution of natural resources: government or private sector?

3. Revisiting an old issue: Privatization of forest resources • Should forests be under public/gov’t control/ownership? • If gov’t intervenes, to what extent should it intervene?

4. Advantages of private control of resources:

5. Advantages of private control of resources: • Private will produce & supply goods if $ is made • Healthy property rights system needed for market system to function • Market place - people vote with their $ and are more responsive; Government - no continuity, officials have service terms, admin changes • Private allocates resources more efficiently than government

6. Advantages of public control of resources:

7. Advantages of public control of resources: • Regardless of economic shape, public still concerned with environment • Management separated from ownership – private management can easily “cook” books to show efficiency (examples?) • Public/political process  more accountability, transparency • Political process  checks on operations of bureaucrats

8. So what is best? • Private ownership? • Public ownership? • Any other form?

9. Advantages for mixed control of resources: • Shortcomings of the markets – limited • Political incentives to adopt public programs • Above reasons will lead to extensive government involvement in forest resource allocation

10. A Mixed Forest Economy Scarce Resources Public means Private means Budget Market Political process Pricing process Public wants Private wants Human wants (wood, water, wildlife, recreation, range, wilderness, aesthetics, minerals, etc.) Figure 3-1. Mixed forest economy

11. Approaches to allocating and distributing forest resources: • unregulated markets • gov’t educ./assistance for landowners to promote public goals, • gov’t regulation of resource mgmt on private lands; • public ownership & gov’t mgmt of forest lands

12. Forests and American Values American values influence forest policy. But values vary through time & among groups. 1. Individualism and Property Rights 2. Community, and Equity and Democracy 3. Integration (individualism & community/equity)

13. Market and Non-Market Goods • Market Goods • with exclusive rights; traded in market • Principle of exclusion can be applied 2. Non-Market Goods • One’s consumption doesn’t exclude others from enjoying same Joint consumption – use of good by > 1 person

14. Market and Non-Market Goods :Other classifications – 4 types • Private goods – timber, forage • Toll goods – air, fish in open sea • Common-pool goods – national parks, movies • Collective goods – air/water pollution control, police protection Gov’t: intervention –decision-making/enforcement (collective or common-pool goods) works with private sector (provision & distribution of collective goods/services)

15. Forest Outputs & Issues • Variety of forest goods & services • Problems arising from varying degrees of: • joint production (MU) • exclusivity vs jointness of consumption, • marketability • Commodity-noncommodity nature • Result: Issues!

16. Forest Resource Outputs – Issue/s? • Timber • Wildlife • Range • Water • Recreation • Wilderness • Others – Minerals, gas, and oil lie underneath forest lands; residences and vacation homes in forest lands

17. Markets & Forest Resources: The Neoclassical Economic Theory • basic assumption: free-market economy • Adam Smith: Supply & demand determine price • Alfred Marshall: free-market economy generated by the price system • implies individuals’ wants should govern resource use; • efficiency is sole criterion for allocation of goods & serv. • Values not always consistent with American commitments to equity, equality, community.

18. Efficient Market Requirements: Four conditions to achieve efficiency 1. establish property rights to resources 2. buyers & sellers have perfect knowledge 3. atomistic competition 4. transaction costs = 0 • Gov’t role limited to deciding income distribution Q’s; defining/enforcing rules of property & exchange • Voluntary market exchange; efficiency criterion

19. Causes of Market Failures • property rights not adequately defined • non-market costs & benefits (externalities or secondary effects) not reflected in market; • imperfect knowledge (in forestry applies more in production side! • imperfect competition – some sellers/buyers can affect price!

20. The Equity Problem • Equity – who benefits? who pays? • Difficult to determine esp. when non-market benefits & costs are associated • Distribution of Benefits – problems • Equity considerationsjustify gov’t involvement in producing & allocating forest, wildlife, & recreation res. • It is a majorjustification for public parks, wildlife reserves, and associated public resource mgmt agencies!

21. Government & Forestry • Economic Systems • capitalistic vs. communism  pros & cons • Cowboy Economy vs. Spaceman Economy • Conservation and the Land Ethic -- • Aldo Leopold & A Sand County Almanac (Land Ethic) • EF Schumacher – “Small Is Beautiful” – rejected economic efficiency as sole relevant criterion for decisions. • Decision Guidelines – social, political, economic, environ. • Illustration: Historic Forestry Debates • Market Proponents – lumber industry; Wilson Compton, in 1919 national debate on federal regulations on private timber cutting & forest mgmt • Government Advocates – Committee for the Application of Forestry (foresters

22. Open economy; past Resources regarded as limitless; Exploitative Production, consumption viewed favorably Lives for the day, ignores tomorrow Closed economy; present Earth has limited reserves of resources Minimize consumption & production Conservation of resources for future generation Cowboy Economy vs. Spaceman Economy Cowboy Economy Spaceman Economy

23. Schumacher: “Small Is Beautiful” • Economics -- not the only relevant criteria for decisions. • Decisions produced using econ criteria are fragmentary! • Supply only one result  whether or not it yields $ to those who undertake the activity • Using economics, if something fails to earn an adequate profit in $ terms  not good! • There are other assets or activities that society keeps or does because of non-economic values (social, moral, natural, etc)

24. Leopold’s Land Ethic • A Sand County Almanac • Criticism on the strength of the profit motive (economics) in land use decisions • Considers intrinsic values of components in the ecosystem otherwise not meeting $ gains • Advocates gov’t conservation, limits to gov’t enterprise • Land ethic – later became part of SAF’s Code of Ethics

25. Leopold’s Land Ethic • Land ethic: “… a system of conservation based solely on economic self-interest is hopelessly lopsided. It tends to ignore, and thus eventually to eliminate, many elements in the land community that lack commercial value, but that are essential to its healthy functioning. It assumes falsely…that the economic parts of the biotic clock will function without the uneconomic parts. It tends to relegate to gov’t many functions eventually too large, too complex, or too widely dispersed to be performed by gov’t.”

26. Compton’s 1919 treatise on issues to support market/private control of resources Which of his 14 issues are still current/ relevant today?

27. Compton’s 1919 treatise on issues to support market/private control of resources 1. “cheap & plentiful timber not a sign of wealth” – forest products cheaper than other commodities producible from same land & capital, so that forestry not a good use of land & capital. 2. non-reforestation of cut-over lands – not a misfortune? 3. old-growth forests? harvest of old trees – not a public loss? 4. loss of species – not detrimental to public welfare 5. land’s greatest productive use should not dictate its use, that is, lands should not be used for growing trees even if they are suited for growing trees. 6. disappearance of timber industries in certain regions due to exhaustion of timber supplies is not necessarily a local or national misfortune

28. Compton’s 1919 treatise on issues… 7. timber as a “mine” and not a “crop” 8. shrinking employment in the forest industry 9. land use change from forest to non-forest uses, esp. if reforesting it is poor economics 10. poor quality cutover sites are uneconomical to reforest; if public wants it – then public does it! 11. no difference in public vs. public obligation in using lands to grow timber or ag crops for profit? 12. incentives issue -- How much to pay landowner to produce for public benefits or gains? 13. equity issue – public use of private land, public pays additional cost 14. maintenance of idleness of cut-over lands is not always wasteful

30. Crompton’s 1919 treatise on issues to support market/private control of resources Current: 2, 4, 5, 6, 10, 12, 13 Not current: 1, 3, 7, 8, 9, 11, 14 numbers 2, 5, and 10 are similar!

31. Compton’s 1919 treatise on issues to support market/private control of resources 1. “cheap & plentiful timber not a sign of wealth” – forest products cheaper than other commodities producible from same land & capital, so that forestry not a good use of land & capital!!!! 2. non-reforestation of cut-over lands – not a misfortune???-- real issue 3. old-growth forests? [harvest of old trees > new trees growing] – not a public loss? 4. loss of species – not detrimental to public welfare 5. land’s greatest productive use should not dictate its use, that is, lands should not be used for growing trees even if they are suited for growing trees! – TRUE  urbanization + other uses 6. disappearance of timber industries in certain regions due to exhaustion of timber supplies is not necessarily a local or national misfortune

32. Compton’s 1919 treatise on issues to support market/private control of resources 7. timber as a “mine” and not a “crop” --- no longer an item today! 8. shrinking employment in the forest industry – relate to #6 9. land use change from forest to non-forest uses, esp. if reforesting it is poor economics 10. poor quality cutover sites are uneconomical to reforest; if public wants it – then public does it! 11. no difference in public vs. public obligation in using lands to grow timber or ag crops for profit??? 12. incentives issue -- How much to pay landowner to produce for public benefits or gains? 13. equity issue – public public use of private land, public pays additional cost 14. maintenance of the idleness of cut-over lands is not always wasteful

34. Illustration: Privatization of NZ Forest Service • Q: is it possible to do in the US what NZ did for its forest service? • Background: NZ Forest Service did same thing as USFS: • research, landowner assistance, policy development, pest control, mgmt of publicly owned forest land. • Developed & managed plantations; also sold timber (commercial). • Lost money; they tried to fulfill political objectives at the expense of business objectives. • 1980s altered its public policies on forestry • 1983: newly elected Prime Minister did some changes in forestry • Min. of Forests – research, policy dev’t, landowner assistance • Min. of Environment – control native forests, most were reserved as national parks • NZ Forestry Corp. – mgmt of plantations and sawmills; sold to private investors; later sold timber only, not lands

35. Illustration: Privatization of NZ Forest Service • Q: is it possible to do in the US what NZ did for its forest service? • In US, possible reasons and proposals for privatization: • Outright sale • Long-term leasing of productive forest lands to industry for mgmt & harvest rights • Short-term granting of concession rights to the land • Cost-sharing arrangements between public & private orgs. • Problems in western US public range mgmt – prompted similar call for privatization!