Economics of Forest Resources

Forests and forestry have always been important for human welfare. In recent years, this importance has increased following challenges related to issues like deforestation, climate change, bio-diversity, water catchment and value added in forest industries. The book Economics of Forest Resources by Gregory Amacher, Markku Ollikainen and Erkki Koskela provides an introduction to forest economics and a technical overview of its development, with focus on the last 25 years.

The book is divided into three main parts. Part I presents an overview of historical and classical core models that every serious student or researcher of forest economics must know: the Faustmann rotation model, the Hartman models of timber and amenity production and the two-periodic life-cycle models. The basic structure of these models is carefully explained, and then extended to cover interesting applications like analysing competing land uses and carbon sequestration in the Hartmann case, and overlapping generation and forest taxation incidence in the two-periodic life-cycle models. Among the issues mentioned for further investigations are describing better the amenity production between stands and targeting bio-diversity conservation, carbon sequestration issues and climate considerations.

Part II deals with policy problems, focusing on the design of forest policy instruments from the perspective of a government or social planner. First, two main questions are addressed: which taxation instruments are best under various regimes and what are their appropriate levels? Then the authors consider the global problem of deforestation, with focus on property-right risks and illegal logging activities. Biodiversity conservation in boreal and temperate forests is analysed addressing auctions and green tree retention. Finally, forest age-class models are introduced, and an overview of existing studies is presented. The authors distinguish between three types of problems here. A ‘first-best’ taxation problem is solved when an instrument set is chosen to eliminate distortions in landowners' forest management decisions that cause distortions in the level of public goods consumed by non-landowners. A ‘second-best’ taxation problem arises when the government taxation aims at only collecting tax revenues, and the third type of problem reflects combinations of the two first-mentioned ones. Although the history of optimal taxation in public economics is long, its use in forestry problems is recent, making this part of the book of particular interest. Among the issues mentioned for further investigations are evaluating the (possible) inefficiency of actual policy instruments targeting forests, developing new and efficient voluntary instruments for forest landowners, preventing invasion of unwanted species and analysing simultaneous trade-offs between bio-diversity conservation, carbon sequestration and invasive species in age-class models.

Part III presents advanced topics, focusing on the main types of uncertainties involved in forestry and their implications for policy. This includes special chapters on uncertainty in life-cycle models using different theories (among them the non-expected utility theory), risk of catastrophic events, stochastic rotation models applying option theory and optimal stopping and a final chapter on dynamic models of forest resources based on optimal control theory and dynamic programming. Among the issues mentioned for further investigations are applying several financial portfolio models for hedging against catastrophic risks and using so-called robust control models from the macroeconomic literature which deals with fiscal policy shocks in the economy.

Each book chapter has a historical introduction and presents interesting links between various models and chapters. Each chapter also ends with a summary, pointing out how far one has come in the scholarly field according to the authors and indicating promising future research issues. An appendix gives a useful overview of key mathematical concepts and methods needed to understand the models and results developed in the book.

In many respects, this is a very interesting and timely book. One has to be impressed by the work it must have taken to produce such a coherent textbook. Should I criticise anything, it is that it lacks a thorough discussion of the weaknesses of the methods and assumptions applied compared with real-life situations: What are the main simplifications made and how do they influence the results compared with real-life situations? How do the analytical optimal solutions compared with the observed actual forest owner behaviour? How much is it to gain – for the forest owners and society at large – if the forest owners behave more like the optimal solutions found in the analyses?

The first five chapters may, in my opinion, be suitable for advanced undergraduate students in forest economics and resource economics, whereas the remaining parts are best suited for graduate students in forest economics and general resource economics. The book may also serve well as a textbook in forest economics for general economists who want to know more about applications in forest economics.

Somewhat simplified, one may say that forest economics today is divided in two main ‘camps’. The first one is dominated by general economists being strong in economic theory, but applying this theory on the use of forest resources with sometimes limited concern about the realism in the assumptions made regarding forest ecological and biological processes. The second ‘camp’ may be said to emphasise realistic description of forest biological and ecological issues and large-scale programming modelling, but having limited concern about agent behaviour and economic theory. A classical example here, which is also demonstrated partly in this book, is the use of age-class forest models, where factors like competition between species, planting densities, thinning types and timing, bio-diversity aspects, etc. often are omitted. The ideal is, of course, to be strong on both economic theory and consideration of natural resource processes in realistic ways, according to the problem analysed. This book may be important in bridging the gap between these two ‘camps’, as it gives a comprehensive overview of how far (or short) studies emphasising economic theory have made it in relation to forestry, and provides new ideas for improved cooperation between the two camps.

The preface of the authors expresses that the intention of their book is to be a text for both learning and pondering, and to stimulate new research. In my opinion the authors have succeeded very well – this is a book which deserves indeed to be used as textbook in graduate and higher undergraduate teaching, and to be read by established researchers in the field of forest economics.