THE ECONOMICS OF TIMBER EXPLOITATION IN OPEN ACCESS REGIMES

Forests are usually characterized in the literature as renewable resources. Nevertheless, the overexploitation of forests can lead to its exhaustion. If the rate of harvest exceeds the annual natural growth rate, forests are going to be exhausted since the extraction pattern is unsustainable. In this case, timber exploitation can be treated equivalently as non-renewable resources. A special case of the previous situation occurs when timber is extracted and the land is permanently converted for agriculture and cattle rising. This is very much, as discussed previously, the case of deforestation in the Brazilian Amazon.²⁴

As it is well known, natural resources differently from other kind of produced goods, do not dissipate the producer surplus by competition in the long run. The rents associated with a natural resource will generally have two components: one static and the other dynamic. The static part of the rent is called the differential or Ricardian rent. It is defined as the excess of the market value of supramarginal units of natural resources over current scarcity rents. It is analogous to the Ricardian "diminishing returns" and it is viewed as a static surplus. These natural resource rents arise from heterogeneity in land quality (in this case, differences in the quality of natural resources) and are not related to time. Hence if exhaustible resources are heterogeneous, part of the rent is a differential or Ricardian rent.

The dynamic component of the total rent, the scarcity or Hotelling rent, is related to the characteristics of exhaustible resources. Scarcity creates economic rents that are captured by the owner of the resource if property rights are well defined. These rents generated by a natural resource are closely related to the concept of user cost. The user cost is the present value of all future sacrifices associated with the use of a particular unit of a natural resource in the present. Since any unit consumed today is lost for future use, the present extraction and consumption of the resource implies an opportunity cost, the value that might be obtained from this resource in the future.

Allocating the resource efficiently over time will imply extracting and selling a quantity that is lower than the one equating price to marginal cost. This difference between the marginal cost schedule and the price is the user cost. The scarcity rent can be defined as the user cost of the marginal unit being extracted at any point in time. In other words, it is the payment accruing to a natural resource owner when the user cost is positive. This is a forward-looking concept in the sense that it should anticipate future increases in demand and changes in extraction costs.

Developing country’s natural resources are usually characterized by the weak definition of property rights, with numerous of them being characterized by an open access regime.²⁵ When perfectly defined property rights exist and given other regularity conditions,²⁶ agents exploiting resources will take into account the user cost and will maximise profits efficiently in a dynamic sense. However, if property rights are not well defined, economic agents will not take future scarcity into account in their maximization decision. In this situation, the existence of positive rents is no longer guaranteed and scarcity rents will generally be driven to zero.²⁷

Under an open access regime, economic agents will simply decide to enter the exploitation of the resource based on a comparison between the cost of entrance and the expected income they will get from the activity. If the net expected benefit from the activity is positive, they will always decide to enter and exploit the natural resource. The problem with this result is that the private evaluation of net benefits is different from the social evaluation. An economic agent deciding to exploit a given resource will not take into account the fall in other agent’s income that is caused by his entrance. Hence, a negative externality is imposed on other economic agents. The intuition behind this result is that each agent acts under the assumption that there is no use foregoing some harvest today in the interests of having reasonably sized stock tomorrow because if he does so, the resource will be caught by another agent tomorrow since entry is "free" [Hartwick (1980)].

Therefore, in an open access situation, the economic agent will not be compensated by the market from restraining his harvest in the present in benefit of future gains. As Hanna et alii (1995) point out: "Under a regime of open access, claims to resources are realized at the point of capture, and owners have no specified duty to maintain the resource or constrain its use". Nevertheless, it is important to note that open access does not necessarily imply unlimited harvest of resources since there is always a cost to extraction.

Also, according to Hanna et alii (1995), property rights regimes must perform certain functions such as limiting use, co-ordinate users and respond to changing environmental conditions. These activities involve transaction costs of co-ordination, information gathering, monitoring and enforcement. The transaction costs are influenced by the particular structure and context of the property rights regime and the conditions of the ecological system. These costs are therefore a function of the amount of agents to be coordinated, the area over which the monitoring and enforcement is going to take place and the amount of information needed.

It is well known that observed market prices only reflect scarcity when there are no market failures in the economy. The clear definition and enforcement of property rights are basic assumptions in the calculation of changes in values of natural resources stocks. Hartwick (1991) makes explicitly clear that one of the basic assumptions of his results is that property rights are well defined and universal. Not enforceable property rights imply an inefficiently low shadow price on the stock of the resource causing rents to be dissipated. Scarcity rents will be decreased and taken to zero in the extreme case of complete open access.

The Brazilian Amazon seems to be characterized by an intermediate case between private property and open access. Although property rights are not defined ex-ante in the frontier and beyond it, there are some stipulated mechanisms of getting property rights over deforested land.²⁸ During many years, this colonization pattern caused a race for new land motivated by speculative motives. Economic agents would move to the frontier, clear the land, start an agriculture or cattle raising activity and then wait to get the title for the land. Therefore, ex-post, property rights were defined assuring the economic agent with a stream of benefits into the future. This pattern explains why the race towards the frontier in the Amazon cannot be characterized as a pure open access situation.²⁹

The implications of the quasi-open access situation to the calculation of economic depreciation are very important. Since the extraction of the resource is not optimal, Hotelling rule does not hold. The resource is going to be extracted faster than it would have been under an optimal situation. Since the equivalence between depreciation and Hotelling rent depends on the Hotelling rule, this will also break down. Part of the scarcity or Hotelling rent will be dissipated, so depreciation will appear to be lower than actually is.

Using the definition of Hartwick and Hageman (1993), depreciation is the change in the value of an exhaustible resource under optimal use. Since the value is calculated using the present value of all the expected net revenues from the stock, it will be lower under incomplete property rights. There will be an intertemporal externality, namely an agent extracting timber will adjust its harvest until the current marginal cost equal the current discounted average payoff and not the marginal payoff. Since the average payoff is lower than the marginal payoff, the discounted value will also be lower and depreciation will be lower.

This shows us that the previous definition of depreciation is not correct if the resource is not extracted optimally. This result should not be surprising. Since depreciation is the decline in the value of the resource and the resource is not valued correctly by the market, depreciation is also not going to be calculated correctly.

Under sub-optimal exploitation, Hotelling rule is no longer guaranteed and we could have any rule being used to form expectations over the evolution of the resource price. In this case, we could have idiosyncratic rules being used by individuals to form expectations with particular perceptions on the depreciation rate. Consequently, the decentralized allocation would differ from the planner’s solution and the question of how to incorporate this into a coordinated formal model is still an open issue.

Summing up, the question for the application of current accounting techniques is whether depreciation may still be valued under these sub-optimal conditions based on Hotelling rent measures or this relationship will break down?