Forest Economics

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Forest Economics

Janaki Alavalapati, Virginia Polytechnic Institute and University


Forest Economics is a discipline that studies the production, distribution, and consumption of forest products and services. It characterizes the mental calculus of a decision maker, whether a private landowner or a policy maker, by focusing on the relationship between ends and scarce means (resources) that have alternative uses (Robbins 1932). In other words, forest economics is the study of choices relating to forest conservation and management.

Technical Information

While some features such as long time frames in production, production of multiple products (timber and non-timber products), and multiple stakeholders make forest economics some what unique and challenging, it draws heavily from the main field economics and thus can be considered as an off-shoot of conventional economics. For example, theory of supply and demand, which attempts to describe, explain, and predict the price and quantity of goods and services produced and consumed in competitive markets, is the basis for a wide range of forest economic analysis. The marginal approach, wherein the price level is determined by the marginal cost and marginal utility, which became increasingly important in economic theory in the late 19th century is central to forest economics.

Furthermore, forest economics also adopts both positive and normative approaches, respectively, to explain economic phenomena or behavior (timber supply or timber consumption for example) and to set rules, prioritize choices/actions by a set of criteria. Institutional economics, which focuses on understanding the role of human-made institutions in shaping economic behavior; Pareto improvement, a fundamental principle of welfare economics which states that a movement from one allocation to another that can make at least one individual better off without making any other individual worse off; and neo-Pareto improvement--if potential gains of movement from one allocation to another outweigh potential losses—are extensively used in forest economics.

Major Forest Economic Issues

One of the economic issues relating to forest management that can be traced back to the beginning of nineteenth century is forest land valuation and optimal timber harvesting age. Faustmann (1849) proposed an approach to assess the value of land under forestry in perpetuity by solving for optimal timber harvest age. In the last three decades several successful attempts were made to extend the Faustmann approach to incorporate complex issues such as stochastic nature of prices and costs, interest rates, timber yields; imperfect market conditions; and non-timber products and services (Hartman 1976; Fina et al. 2001; Stainback and Alavalapati 2004).

Estimation of timber supply and demand, identifying the gap between the supply and demand; and domestic and international trade in forest products at regional, national, and international level have been the key issues in forest economics. Sedjo and Lyon (1990) provided a global perspective on long-term adequacy of timber supply based on economic theory of long-run adjustments in timber harvests and global timber production and trade. Sills and Abt (2003) recently edited valuable research reviews on economics of timber and nonmarket supply, demand, and international trade analyses of forest resources.

The objective of managing forests for both timber and non-timber products (biodiversity and recreation for example) have prompted forest economists to pay increasing attention to optimizing multiple objectives. Economics of multiple-use forestry explored by Bowes and Krutilla (1989) laid foundations for valuing non-market services of forests and incorporating them into forest planning.

Several forestry issues that are on the horizon warrant rigorous economic analysis. For example, economic and distributional impacts of carbon markets and forest carbon sequestration, forest certification, and use of forest biomass for energy production are not well understood and forest economics is expected to play key role in addressing these issues. In addition, Kant (2003) noted that existing forest economic models are limited in that they do not address the issue of multiple equilibria and consumer choices that incorporate context specific and dynamic preferences and called for extending the boundaries of forest economics.

Forest Economic Methodologies

Forest economic models can be viewed as abstract representations of the real world useful for hypothesis generation, forecasting, policy analysis, and decision-making (Buongiorno and Gilles 2003). Some are designed to assess simple cost and benefits of outputs and inputs for which markets are fairly established while others are amenable to assess a variety of environmental services and damages for which there are no established markets (Alavalapati and Mercer 2004). Furthermore, some methodologies are more appropriate for assessing issues at a forest stand or household level while others are more applicable at landscape or regional and national scales. Following are some of the commonly used models in forest economics:

  • Partial budget models to estimate profitability of a forestry enterprise
  • Optimization models to estimate land expectation values assuming that the land will be used for forestry (the best possible productive use) in perpetuity
  • Linear and non-linear programming models to estimate optimum resource allocation subject to various constraints faced by the decision-maker
  • Econometric models to estimate the relationships among variables under investigation for forecasting, policy analysis, and decision-making
  • Stated and revealed preference based contingent valuation models to estimate values for environmental goods and services such as recreation, soil conservation, and water quality
  • Economy-wide models such as input-output, social accounting matrix, and computable general equilibrium models to estimate income, employment, and price levels at regional or national level, in response to a policy or program

Forest Economics Publications

The surge in forest economic research has generated a huge demand for publication outlets. In addition to many text books (Klemperer 2003; Buongiorno and Gilles 2003) and edited volumes (Sills and Abt 2003; Kant and Berry 2005), peer reviewed journals with “forest economics” came on board. For example, both Journal of Forest Economics and Forest Policy and Economics started in mid 1990s. Forest economic research is extensively published in agricultural economics, resource and environmental economics, land economics, and other economic journals.


Alavalapati, J.R.R. and E. Mercer 2004. Valuing agroforestry systems: Methods and applications, Kluwer Academic Press, Dordrecht, The Netherlands, pp 1-314.

Bowes, M.D. and J.V. Krutilla 1989. Multiple-use management: The economics of public forestlands. Washington DC: Resources for the Future, pp 384.

Buongiorno, J. and K. Gilles 2003. Decision methods for forest resource management. San Diego, California: Kluwer Academic Publishers.

Faustmann, M. 1849. On the determination of the value which forestland and immature stands posses for forestry. Translated by Gane, M. Oxford Institute Paper 42, 1968.

Fina, M., G. S. Amacher, and J. Sullivan 2001. Uncertainty, debt, and forest harvesting: Faustmann revisited. Forest Science 47: 188-196. Hartman, R. 1976. The harvesting decision when standing forest has a value. Economic Inquiry 14: 52-58.

Kant, S. 2003. Extending the boundaries of forest economics. Forest Policy and Economics 5: 39-56.

Kant, S. and A. Berry. 2005. (Eds.). Economics, Natural Resources, and Sustainability: Economics of Sustainable Forest Management. Kluwer Academic Publishers.

Klemperer, W. D. 2003. Forest Resource Economics and Finance. McGraw-Hill, pp 551.

Robbins, L. 1932. An Essay on the Nature and Significance of Economic Science. London: Macmillan, pp 1-160

Sedjo, R..A. and K.S. Lyon 1990. The long-term adequacy of world timber supply. Washington DC: Resources for the Future, pp 230.

Sills, E. O. and K. L. Abt (eds) 2003. Forests in a Market Economy. Kluwer Academic Publishers, Dordrecht, pp1-378.

Stainback, G.A. and J.R.R. Alavalapati. 2004. Modeling Catastrophic Risk in Economic Analysis of Forest Carbon Sequestration. Natural Resource Modeling 17 (3): 299-317.

Posted 18 August 2007

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