Market Failures And Tropical Deforestation

Logging activities are one of the main causes of tropical deforestation. This study analyzes the impact of market failures in the logging industry on tropical deforestation.The link between poorly defined property rights and deforestation is explored. Two-period and long term frameworks are set up to analyze respectively the impact of non-transferability of logging concession and the influence of rapid expiration of logging title on tropical deforestation. Considering the probability that the concession will not be renewed sometime in the future, the study shows that rapid expiration of logging titles exacerbates tropical deforestation. Taking to account the bargaining over the harvest concession transferability, the study states that non-transferability of logging concessions increases tropical deforestation. To curb wasteful deforestation the government should take to account the specific nature of the timber by granting longer concession so that logging firms can get return on their huge investment without needing to rush and destroy wastefully the forests because of the short term of the logging contract. Furthermore, the forest administration should grant transferable logging concessions in order to avoid or diminish wasteful deforestation.The study also examines the impact of tropical deforestation due to logging industry on social wellbeing when the government cannot observe the deforestation rate realized by logging firms. A principal-agent game theoretical framework is developed. The study shows that when the government cannot observe the deforestation realized by the logging company, an increase in tropical deforestation due to logging industry decreases social wellbeing. Since the government knows the technology capacity of the logger when granted him a logging title, a conceivable remedy, to avoid or reduce moral hazard phenomenon, is the input regulation by imposing forest resource taxation license fees.