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Are the world's tropical forests being converted to alternative uses at the economically optimal rate and if not why not? What can be done to prevent the inefficient conversion of tropical forests to agriculture or other uses?

Tropical forests are ecosystems which provide benefits on local, national and global levels although inevitably at a cost. Extracting these benefits usually occurs through the process of deforestation. However, this can lead to the destruction of other beneficial resources that grow naturally. Deforestation can be difficult to define due to the number of differing techniques. Although, in general terms it is the procedure of removing the forest and converting it to alternative uses. Many years ago rainforests used to cover '12 % of the Earth's land surface', it is now 'less than 5%' (, 2006). There are many methods of deforestation for example felling, logging, slash and burn. The main uses include; timber production, medicines, habitats, agricultural land, cultivation of food, tourism, cattle ranching and alternatively acting as a carbon sink and also helps in the maintenance of biodiversity. The economically optimal rate of conversion is where the marginal cost of deforesting an area is equal to the marginal benefits associated with preserving that area. In spite of the beneficial economic uses derived from these natural and limited resources, these forests are being cannibalised at a remarkably rapid and unsustainable rate that will have long term economic consequences. The government subsidised the process of logging and slash and burn to clear land for farming as well as their use for the pharmaceutical industry resulting in the unsustainable use of these forests.

Deforestation is occurring at an alarming rate of '2 per cent per annum', (Turner et al., 1993). The causes of deforestation can be split into two categories; proximate and fundamental. Proximate causes are the direct method in which deforestation occurs such as slash and burn, logging and cattle ranching. Whereas fundamental causes can are competition for space between animals and humans and the failure of economic systems through the misrepresentation of value of the forests and market failure; where the market is not producing at the socially optimum (Wibe and Jones, 1992). Costs and benefits of deforestation need to be considered on three different scales; private, national and global. The financial and environmental costs are likely to be much higher on a global scale than privately, on the other hand value is another key idea to consider. Locally and nationally the value of the forest would be much greater thus these costs would have to be considered also.

Logging is the process in which certain species of trees are removed for timber. For this procedure to occur, roads need to be built in order to transport the wood to the market, causing a great deal of deforestation. Logging companies would say that road building is economically beneficial, as the costs would be far less than the benefits. This is linked to the increased access to the forests in a shorter amount of time, thus the stumpage value is the same for a longer travelled distance. The diagram below reflects this.

However, in the short term the benefits may not be fully realised until return on the investment occurs. Ensuring successful and efficient transportation of the trees is critical due to the enormity of the cost. Thus, when one considers the long term perspective, it is after roads are built that benefits are reaped and are equal or greater than costs. Also when trees are logged the likelihood that only that particular species of trees will be damaged is minimal. Soils will also be damaged and thus future use will be very minimal, this is an opportunity cost of the potential economic use. However, the final product of logging; timber, is seen as an essential product although there seems to be substitutes. The direct cost to the habitat is highest through habitats, the biodiversity and also indirectly on a global level, through climate change. Hence, logging is not occurring at an optimum level of conversion due to the harsh nature of the process. If a habitat is destroyed this may lead to knock on affects on the soils thus the land is unviable for any economic purpose. To prevent this inefficient conversion, governments need to prevent illegal loggers operating; this would help reduce the environmental impacts. Governments should also consider imposing property rights; these give individuals or groups the authority over an economic resource. A key cause of deforestation is the lack of property rights, as no one owns the land there is a lack of protection for areas. Another idea of prevention is taxing loggers for what they remove from the forest, in order to discourage loggers from deforesting unsustainably. However, monitoring this would prove difficult and as a result making it hard to enforce. Furthermore, by taxing for what loggers remove from the forest does not account for the trees they may have damaged in the process of removal.

The main cause of deforestation in a majority of areas is the slash and burn technique; the process of burning forests in order to make fields for agricultural purposes. Slash and burn is said to be used by '200 to 500 million people around the world' (, 2006). This technique is very destructive to the environment as once the area has been burnt the soil is not of great quality and fertility of the land will only last for a few years. New land will then be found and the cycle will thus continue. In comparison to other agricultural techniques slash and burn may seem to be more sustainable and productive than current day technology intensive agriculture. (, 2007). This suggests that it could be closer to the economic optimal rate than other methods of agriculture. However, there are still too many costs to consider including the widespread environmental damage to the local and global ecosystem. To prevent inefficiency governments should stop subsidising agriculture, and consider more efficient ways to sustain it. Furthermore they must also stop encouraging exports through the use of subsidies which would be economically beneficial, but the larger the market the greater the impact upon the environment. When the land is abandoned, the costs of deforestation are reflected; other uses of the land would then be very unlikely thus making the land unsustainable. Governments need to find ways in which the area can be utilised or regenerated in order to encourage sustainability. By subsidising these activities, financial costs for these firms are much lower, and therefore returns are far greater. Thus, encouraging even more of this unsustainable practice.

The plants and animals in the tropical forests hold a great deal of chemical properties which can be used for medicinal purposes. The genetic material also has an intrinsic value (Perman et al., 2003), which takes into account the value to both animals and inhabitants of the forest. Transactions of this genetic material may take place privately or via large pharmaceutical companies. Therefore, royalties and fees are sometimes not paid to the right people due to the lack of property rights. The potential economic return on the discovery of new benefits of plants and in the production of medication is very profitable. An example of a plant which can be extracted is the rosy periwinkle, found in Madagascar in the 1960's,' (Cairncross, 1995) it has been claimed to help with the treatment of cancer. The conversion can be seen to be efficient, as there seems to be no intensive techniques to extract these plants. The only major cost to consider would be transport and production of these plants. However, the benefits in terms of profits and the impact globally should counteract the financial cost. Nevertheless, the biodiversity of the forest will inevitably be irreversibly affected and species may be lost. To prevent the inefficient conversion of rainforests, royalties should be paid to the owners of the area, although this would need the implementation of property rights. By enforcing property rights on certain areas, the impact on dwellers may be compensated financially for the loss of its sentimental value. Another method to prevent inefficient depletion of biodiversity is to enforce permits so certain plants do not become extinct and a stable stock is created thus increasing sustainability. This would require strict government enforcement along with regulation which could prove costly.

In conclusion, it is difficult to say as a whole whether the tropical forests are being converted at an economically optimal rate, as all uses tend to have varying levels of impact upon both the environment and dwellers. It is therefore a great advantage to take each use individually to see if marginal benefits are equal to the marginal costs. The current methods by which the forests are being used are not economically efficient or optimal, due to the traits of the processes and the impact upon both the environment and dwellers. However, when considering the need for improved efficiency the key problems for all uses tend to surround the same points. Firstly, property rights are not enforced in tropical forests and as a result people can disrupt and deforest these areas in order to maximise profits, there is no incentive for people to manage forests sustainably. Secondly, the government subsidise deforestation, for example in logging and agriculture. The reason they do this could be to benefit the national economy through the multiplier effect by stimulating the economy. However, it does decrease the efficiency of conversion. Companies extracting the natural resources from rainforests usually have large profit margins and thus do not require subsidies; the government is just providing them with even larger profit margins. Without the subsidies it is still very likely that these firms will still operate in the forests. Instead of subsidies, governments should consider taxes, royalty costs and also fees to encourage sustainable use of the forest; this would improve efficiency of conversion and encourage operation at an economically and also at the socially optimal level.