The aim of this study was to develop a conceptual framework within which the economic efficiency implications of alternative forest resource allocation options could be assessed during both the IAP and CRA process.
The framework established has two focal points:
In essence, the framework provides a mechanism for the comparison of these competing benefits.
The essence of benefit cost analysis (BCA) is the estimation of the extent to which a community is made better off or worse off by a resource re-allocation change. In other words, the social benefits of a change are compared with the social costs. BCA is not a financial appraisal of investment alternatives of the sort that a private corporation may undertake.
BCA features a number of stages:
This entails defining the base case (without change scenario) and the with change scenarios. The base case is the logging option (which includes the 30% reduction on quota quality logs on July 1 1996). The "with" case is the conservation option (which may include a range of options). By defining the two options available in terms of two well established forest management regimes - logging under NSW State Forests management and conservation under the type of management applied by the NSW NPWS - it is possible to identify more readily the range of types of benefits and costs that are most likely to occur.
Using the concept of opportunity cost, benefits and costs are defined in terms of changes in well-being. To identify the benefits and costs of the proposed change in forest resource allocation, it is necessary to identify what would be different under the logging and conservation options (see section 5.5.5).
This stage requires the estimation of all benefits and costs in monetary units. Conceptually, there are two main streams of benefits and costs. The first arises from extractive industry benefits foregone and the second from conservation option benefits gained.
The costs associated with the loss of production of the extractive industries currently operating in forest areas under review can be estimated with reference to market data.
The estimation of both the use and non-use benefits arising from the setting aside of forest areas from logging activity requires the use of non-market valuation techniques. The two techniques that would appear to be most suited to the task are the Travel Cost Method (TCM) and the Contingent Valuation Method (CVM). The TCM uses information relating to the costs of travel to a site to estimate the recreational value of that site. The CVM involves respondents to a questionnaire being asked their willingness to pay for a non-marketed good or service in a hypothetical setting.
The diminishing marginal value of forest reserves that would be expected as more and more forests are set aside can be tested by a single CVM study. A CVM study would therefore need to address the extent of the impacts on use and non-use values of progressively more and more forests being set aside as reserves.
The next stage of a BCA is to integrate the information into a single figure for each reserve area proposed. This is achieved by discounting future benefits and costs to obtain estimates of the Net Present Value of re-allocating forests from the logging option to the conservation option.
If the Net Present Value of setting aside an area of forest as a conservation reserve is positive, then the area should be set aside from logging activities. However, the results of any BCA must be viewed in the light of various value judgements made by the analyst. In particular, most BCAs are carried out without reference to wealth distribution or equity issues. Where equity issues are considered by policy makers to be important, social impact studies and economic impact studies (such as input-output analyses), should be carried out as an adjunct to the efficiency analysis of a BCA.
Although BCA has become the most widely used and accepted technique for analysing economic efficiency, it is still subject to debate in areas such as non-market valuation, shadow pricing, discounting, forecasting, concurrent assessments and unemployment. These limitations must be recognised in judging the results. It is important to note that BCA is not a value free tool of analysis.
The components of the IAP can be readily placed in the context of an economic efficiency analysis.
The studies of the deferred forest area's physical characteristics form the basis of an understanding of the community's value of these areas for conservation purposes. In other words, the benefits of deferred forest areas conservation have been delineated in terms of their environmental features. The studies undertaken do not extend to an estimation of these benefits.
In the negotiation phase of the IAP, the benefits and costs of deferred area reservation are implicitly traded off. This process can be viewed as an implementation of the threshold value approach in its elementary form. This decision is complicated by the addition of safe minimum standard (SMS) constraints that require 15% of pre-1750 vegetation be set aside for conservation purposes.
The IAP can therefore be interpreted as the implementation of the threshold value variant of a BCA, given that no explicit social values of the benefits of conservation have been estimated, within the constraints set by a SMS.
The economic efficiency framework shows that while the IAP was not specifically designed from an economic efficiency perspective, it can be considered in that way. The IAP essentially involves the use of the threshold value approach. This involves the costs of foregone forest earnings being traded off against the scientifically described forest conservation attributes. The trade-off exercise was carried out under the externally defined "rules" of a safe minimum standard of environmental protection.
There is a strong possibility that future allocations resulting from the comprehensive assessment could yield improvements to net social well-being. There is also some potential for gains to be achieved from the fine tuning of the SMS rules that were applied during the IAP. These potential gains are the rationale for adopting a full BCA of forest allocations in the CRA process.
The concepts and estimation techniques involved are not simple. However, without an examination of the economic efficiency consequences of forest resource re-allocations, the community may have difficulty assessing if the choices proposed are in their overall best interest.