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The Design of Second Best Forest Incentives in Small Open Economies

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In this article, we examine the design and choice of forest incentives under second best conditions. The government faces constraints on uses of funds, the government has decided to use a subsidy system despite the welfare costs that exist with these programs, and the government has different preferences for landowner income, nontimber benefits production, and revenue generation. In particular, we examine how government preferences affect the decision to use harvest tax exemptions and the decision to subsidize expansion of the forest tax base through forest conversion. A new approach to studying forest incentive design is proposed where the government is treated as the decision maker and chooses policies to maximize welfare of the forest sector subject to its revenue constraint. This approach allows investigation of efficient reform in an existing forest subsidy system. For an empirical application of the model, we use data from Chile's forest sector to determine short-run dead weight losses of existing subsidies as a basis for reform recommendations. The basic approach in the article should be useful in predicting the behavior of revenue constrained governments. For. Sci 44(1):165-175.

Keywords: Optimal forest taxation; policy reform; second best equilibria

Document Type: Journal Article

Affiliations: Assistant Professor, Department of Natural Resource and Environmental Sciences, University of Illinois, Urbana, IL. 61801. Phone: (217) 333-6271

Publication date: 1998-02-01

More about this publication?
  • Forest Science is a peer-reviewed journal publishing fundamental and applied research that explores all aspects of natural and social sciences as they apply to the function and management of the forested ecosystems of the world. Topics include silviculture, forest management, biometrics, economics, entomology & pathology, fire & fuels management, forest ecology, genetics & tree improvement, geospatial technologies, harvesting & utilization, landscape ecology, operations research, forest policy, physiology, recreation, social sciences, soils & hydrology, and wildlife management.
    Forest Science is published bimonthly in February, April, June, August, October, and December.

    2015 Impact Factor: 1.702
    Ranking: 16 of 66 in forestry

    Average time from submission to first decision: 62.5 days*
    June 1, 2016 to Feb. 28, 2017

    Also published by SAF:
    Journal of Forestry
    Other SAF Publications
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