Forest Economics and Its Implications

Economics is the branch of science that studies the production, distribution, and consumption of goods and services among consumers.

Forest economics is the economics of forestry that deals with the management, production, and utilization of forest resources.

Forest Economics and Its Implications
Forest Economics and Its Implications

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In what ways do forests serve as economic resources?

  • Forests are valuable economic resources because of their multiple uses. It produces timber which is beneficial for making lumber, fuelwood, and paper, and provides environmental services when conserved. 
  • It can generate two or more kinds of benefits simultaneously such as providing fuelwood, and timber along with regulating climate, controlling soil erosion, providing habitat for wildlife, etc.
  • In forest economics, resources refer not only to land and natural resources but also to capital, labor, and human skills that are combined to produce goods and services that are valuable. 
  • However, not all forests are economic resources as some forests are inaccessible, remote, or in poor quality and are not harvestable. However, the non-timber benefits provided by these kinds of forests such as carbon sequestration, nutrient cycling, wildlife protection, and water regulation are more valuable than the timber and should be preserved without human intervention.
  • The economy’s collective supply of productive resources can be classified into four categories: land, labor, capital, and entrepreneurship. Each of them has specific economic characteristics and generates various economic returns, including rent, wages, interest, and profit. 
  • Forest falls into two categories: land and capital. The forest land is fixed in supply and generates a residual value in the form of rent while forest land consisting of standing trees is the capital. Therefore, forestry can be viewed as an investment that yields returns in terms of growing stocks and various valuable ecosystem services.

What is the Economic Valuation of Nature?

Economic valuation is a tool that helps decision-makers choose between alternatives. When it comes to the valuation of nature, natural resource value is determined by market prices for direct uses and by non-market prices for indirect uses. 

The total economic value of nature can be categorized into: Use values and non-use values.

Use values

    1. Direct use values: Products that can be consumed directly such as values related to wood products (timber, fuel), non-wood products (food, medicine), recreational, health, etc.

    Tools to be used: Market analysis, Travel Cost Method, Related Goods Approaches, Contingent Valuation Method, and Hedonic Pricing.

    1. Indirect use values: These are functional values related to nutrient cycling, air pollution reduction, carbon storage, flood regulation, etc.

    Tools to be used: Restoration Cost, Preventive Expenditure, Production Function Approach, and Replacement Costs.

    Non-use values

      1. Option values: Values associated with possible future use of the goods and services of direct and indirect use such as biodiversity conservation, forest protection, etc.
      1. Bequest values: Values associated with the possible future use of goods and services of direct and indirect uses by the offspring of the actual stakeholders such as habitats, etc.
      1. Existence values: Values that are associated with the knowledge of continued existences, based on moral or conviction such as preservation of endangered species, etc.

      Tools to be used: The Contingent Valuation Method is used for all non-use values.

      Common Valuation tools to be used

      Valuation tools are the methods or approaches that are used to estimate the monetary value of non-marketed forest goods and services. Some of the most commonly used valuation tools:

      1. Market analysis: It is used to translate the direct use value of goods and services traded on the market into monetary terms by taking their market price.
      2. Travel Cost Method: It is used for the valuation of recreational amenities by using the travel expenses needed to reach the recreational site.
      3. The Related Goods Approach: It uses the price of related goods for which the non-marketed goods can be exchanged.
      4. Hedonic Pricing Method: It is used to put values on property and land concerning the environment or its surroundings.
      5. Contingent Valuation: It is the most common valuation tool for estimating the monetary value of environmental amenities. It is based on people’s willingness to pay for a specified good or service or willingness to lose it.
      6. The Replacement Cost Method: It is used for estimating the cost of replacing the benefits with an alternative good or service.
      7. The Production Function Approach: It measures the indirect value related to ecological functions that contribute to economic activities.

      What are the practical implications of Forest Economics?

      1. Forest economics is concerned with the protection, development, harvesting, and utilization of the full range of goods and services associated with the forest to meet the objective of the forest manager.
      2. It serves as a decision-making tool using cost-benefit analysis for the economic problems involved during forest management such as plantation, harvesting, selling, and valuation of forest goods and services.
      3. It identifies the limitations of the forest resources, assesses risks or uncertainties, and helps identify the alternative course of action for minimal loss.
      4. It helps in the evaluation of expenses and profits associated with different forest products which helps the forest managers to estimate the return from each forest product.
      5. It employs various economic models to assess the practical dynamics of supply and demand which helps to forecast market conditions.
      6. It compares values that occur at different times to determine the extent to which present values are preferred over future values, as forest management, like many other economic activities, involves decisions about timing- when to plant, when to apply silvicultural treatments, when to harvest, and so on.
      7. It also examines the effects of policies, laws, regulations, and market conditions on the forest sector in order to support decision-making processes that promote sustainable forest management while balancing economic, environmental, and social objectives.

      Choosing the preferred combination and pattern of uses is important without deteriorating the forest condition. The choice must be made about how the forest will be managed, investments will be made, goods and services will be produced, the demands of the consumer will be met, and so forth. 

      Understanding the gaps in the valuation of forest resources within forest economics

      • Traditionally, forest economics is only concerned with the extractive values of the forest mainly for the production of high-quality timber, pulp, and wood. But in recent years there has been growing recognition of non-extractive benefits such as biodiversity preservation, water regulation, carbon sequestration, and more.
      • These non-extractive benefits are becoming increasingly important, yet their economic valuation poses challenges. While there are market values placed for woods and timbers, accurate economic valuation of other ecosystem services provided by the forest is very difficult.
      • The emergence of a new forest management approach has shifted focus from conventional forest management to sustainable forest management encompassing forest ecosystem services and biodiversity conservation.
      • Sustainable forest management is a holistic approach to managing forests to achieve one or more specified objectives of management about the production of a continuous flow of desired forest products and services without undue reduction of its inherent values and future productivity as well as any undesirable effects on the physical and social environment.
      • This paradigm shift emphasizes broader social, economic, and environmental objectives. It acknowledges diverse forest values and seeks to strike a balance between the economic utilization of forest products and the preservation of forests to achieve broader social and environmental aims.

      Further Readings


      1. Price, C. (1989). The theory and application of forest economics (p. 402). Oxford: Basil Blackwell.
      2. Zhang, D., & Pearse, P. H. (2011). Forest economics. UBC Press.

      About Author

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      Monika Jirel

      Monika Jirel is a final-year undergraduate forestry student at Kathmandu Forestry College, Kathmandu. As a passionate youth and a dedicated forestry student, she is interested in volunteering, advocating for climate change, and participating in youth interaction programs. The main topics of her interest are climate change, urban forestry, nature-based solutions, climate education, and biodiversity conservation. She has been engaged in organizations that work for climate change advocacy and youth mobilization, through which she has gained some experience volunteering and promoting green schools in the past few years. She enjoys writing, reading novels, and watching movies.

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