NER L.

19 Forestry:
Environmental Economics: In Theory and Practice By Hanley,
Shogren and White, Ch. 11, pp. 335 354;
Natural Resource Economics By Conrad and Clark, Ch 2, pp. 96 97

Economics of Forestry Exploration:

Forests are also renewable resources but
it has some distinctive characteristics. First
of all, it has multiple values such as:
1.
2.
3.
4.
5.
6.

Timber value
Amenity resource
Store of biodiversity
Carbon store
Reduces severity of floods
Prevent soil erosion

In a situation where non timber values

are significant, the socially optimal forest
rotation may diverge from the private
optimal rotation pursued by forest owners. A
significant part of the forests are
nationalized to ensure that the diverse

objectives of forest management are, to

some extent, achieved.
The tropical rain forests are examples of
another management problem. The largest
areas of tropical rain forests are in some of
the poorest countries of South America,
Africa and Asia. Their destruction is
irreversible and the local and global damage
due to their destruction may, in the long
run, be catastrophic.

Principle of commercial forestry

economics:
The structure of a forestry problem is
distinctly different from the model of fishery.
In the fishery model, the growth of the
biomass and its value was represented by F
(X), which is abstractly independent of the
passage of time. The growth function

summarizes the details of birth, maturation

and death of all cohorts of fish taken
together. Although each cohort moved in
real time, through its life cycle, the specifics
were submerged in the F (X) function.
Trees however are independent and
distinct. Each cohort can be monitored and
its maturation chronicled over time in exact
ways that cannot be applied to fish. The
ownership and control of tress are also most
secure.

Single Rotation:
A single rotation problem starts with
planting and finishes with clear felling.
Assume a representative tree growth
function as given below.
f (t)

t*
t**
t
The aim of the forest owner is assumed
to be maximization of the present value of
profit from felling. The decision variable is
the time allowed to lapse between planting
and felling and replanting. The volume of
timber increases with time and after certain
time the growth is declining. Thus, if we
define the volume of timber in terms of f (t)
with the property:
f (t) > 0 and f (t) < 0, for t > t*
The revenue from planting when p is
constant real price of timber per unit of
volume net of harvest and the planting costs
are a constant c

The current value of profit for a single

rotation is
= pf (T )c

If the costs of planting are incurred at

the start of the rotation and the revenue
from clear-felling at the end with a discount
rate, r, the present value of profit is:
=et p f ( T )c

Now, differentiating with respect to T we

get,
et p f ' ( T ) et pf (T )=0

Or
p f ' (T )
=
( 1)
pf ( T )

The above solution (1) represents single

rotation problem. This states that felling
should be delayed until the return on the
forest stand, the L.H.S of (1) equals the
discount rate.

If replanting is possible and other

parameters remain unchanged then all
rotation period will have the same length, T.
Then the total net present value of all future
forest cutting is

J = { pf ( T )c } {eT + e2 T ++ }

{ pf ( T )c }
e

(2)

T 1

Let,
S={eT + e2 T ++ }
eT { 1+eT +e2 T ++ }

eT {1+ S } 1

Therefore,
T

Se

S=e

Or
S (1eT )=eT

Or
S=

eT
(1eT )

Multiply both N & D by

and after

simplification we get,
S=

1
(3)
( e 1)
T

The optimal rotation period T is obtained

by setting

dJ
=0
dT

in equation (2).

Thus, differentiating 2 w. r. t T we get,

T
'
T
dJ ( e 1 ) p f (T ){ pf ( T )c } e
=
=0
dT
(eT 1)2

Or,
p f ' (T ) { pf ( T ) c } e T
=
e T 1
(eT 1)2

Or
p f ' (T )= { pf ( T )c } . .

eT
(e T 1)

Or
p f ' (T )

=
(4)
p f ( T )c (1eT )

This is called the Faustmann equation.

T is highly sensitive to .
Thus, we have single period rotation
equation:
=

p f ' (T )
( 1)
pf ( T )

and the multiple period rotation as

p f ' (T )

=
(4)
'
p f ( T )c (1eT )

A comparison:
Ignoring c , we can write 1 and 3 as
p f ' (T )
=( 1)
pf ( T )

and
p f ' (T )

=
( 4)
p f ( T ) (1eT )

Since,

1
>1
T
(1e )

Thus, cutting time is short when

repeated rotations are used rather
than a single harvest.