Background

The classic economic issue surrounding deforestation is whether and how forest resources are allocated optimally in order to maximize net benefits to people (Sills and Pattanayak, 2006). Net benefits are the value of goods and services (people's willingness to pay in terms of money or some other valuable resource) minus their opportunity costs (what people have to pay or what resources they have available to invest to obtain the goods and services) (Sills and Pattanayak, 2006). The opportunity costs of forested land can vary considerably (Chomitz et al., 2006; Table 5.1). For instance, in Brazil's cerrado region, converting native woodlands to soy results in land worth more than $3,000 per hectare, whereas land in the Atlantic forest of Bahia, Brazil, is worth just $400 per hectare. As discussed by Sills and Pattanayak (2006), net benefits can be calculated from two perspectives. Private benefits and costs directly affect the families or companies making decisions about how resources are allocated. The private net benefits of deforestation are equal to the value of returns from agriculture minus the value of forgone future forest production. Future forest production includes timber that could be sold, as well as goods consumed directly from forest products (i.e., nontimber forest products). However, these private benefits and costs do not include adverse environmental effects, termed “environmental externalities,” that result from deforestation (e.g., see Table 5.2). The other perspective on net benefits takes into account the cost of externalities to calculate social or public benefits and costs. Many socially valuable goods and services do not have prices because they are public goods and are not traded in markets. Public goods and services refer to those whose benefits cannot be denied to anyone and cannot be divided up and sold. For example, biodiversity and carbon sequestration are public goods provided by forests.

When forest is initially cleared, there are both immediate and future costs and benefits of the harvested timber. The future stream of net benefits from land uses such as agriculture and ranching is equal to the value of outputs minus the cost of inputs. To compare costs and benefits at their equivalent present value, future values are adjusted by a discount rate. The discount rate can vary considerably in time and with location (e.g., Weitzman, 1994). For instance, interest rates in Madagascar have varied between 5% and 22.8% (Kremen et al., 2000).