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Forest economics

This branch of applied economics is mainly focused on sustainable yield timber management, resource extraction and commodity production, excluding a wide range of forest values (local livelihood, ecological, aesthetic and spiritual). The forest is viewed as a storable renewable resource and forestry as an investment with long rotation (production) periods and easily measurable stock growth.

Trees grow according to the logistic function or Verhulst curve (see Verhulst, 1838), that is, they grow quickly at the beginning, and then more slowly. The private owner of a forest (or rather, of a tree plantation) who wants to maximise profits thus compares (a) how much s/he will earn by delaying the cutting and selling of the trees by one year, to (b) how much s/he will earn by cutting and selling the trees today and putting the money in the bank for one year. The higher the rate of interest (or equivalently, the higher the discount rate), the more inclined s/he will be to shorten the rotation period.

We could compare this to Hotelling’s rule in oil extraction economics, where a high discount rate or interest rate implies selling the oil stock faster (see Hotelling, 1931). Here the resource (oil in the ground) does not grow. There is a fixed stock of oil produced by photosynthesis millions of years ago. The profit-maximising owner of an oil well (who follows standard economics) will compare how much s/he makes by leaving oil in the ground or by taking the oil out. If she takes and sells the marginal barrel, s/he earns now the interest that the bank will pay on the difference between price and extraction cost. By instead leaving the oil in the ground, s/he earns the discounted value of the future revenue (again future price minus extraction cost). If the discount rate or interest rate is high, s/he will sell the oil quickly.

Returning to forest economics, here the resource itself is growing. One solution for the single stand rotation problem is found in the Faustmann Rule. This is a model that is used to calculate the ideal rotation period. You cut the trees and start another rotation period again. Should you cut often or rather wait for the trees to grow a little more? The model computes the age at which an even-aged forest stand (plantation) should be harvested in order to maximise the economic return to forestry (Touza-Montero and Termansen, 2001). According to this rule, the optimal time to harvest a standing forest is when the marginal benefits of delaying the harvest equal the opportunity costs of waiting. In fact, Faustmann explained (in 1849) that ‘economic optimal rotation is less than the rotation that produces the maximum average annual biological yield’ since forest cutting means income from timber and also, moreover, some income from the land now free of trees (for pastures, for instance, while the trees start to grow again) (Raunikar and Buongiorno, 2007).

One must recognise the importance of the non-timber values. The non-timber values of mature forests are, for example, flood and erosion control, wildlife and clean water provision, medicinal plants, carbon sequestration, recreation and many others. If these services are more valuable than the timber of a new plantation, the harvest age should be extended. When is then the optimum moment to cut the trees? Perhaps never.

Using the principles of classical forest economics, conventional forest management leads to timber exploitation focusing on the profits obtained by sustainable yields rather than on practices that take into account biodiversity and provision of ecosystem services. Sustainable Forest Management would be a new paradigm with broader social, economic and environmental goals, taking an ecosystem approach that recognises multiple forest values and aiming at balance between economic demand for forest products and protection of the forests for wider social and environmental goals.


Faustmann, M. (1849) On the determination of the value which forest land and immature stands possess for forestry. Translated by Gane, M. Oxford Institute Paper 42, 1968 .

Hotelling, H. (1931) The economics of exhaustible resources, J. Polit. Econ., 39 (1931), pp. 137–175.

Raunikar, R., Buongiorno, J. (2007) Forestry Economics: Historical Background and Current Issues: in Weintraub, A., Romero, C., Bjørndal, T., Epstein, R. (Eds.) Handbook Of Operations Research In Natural Resources. Springer, US

Touza-Montero, J., Termansen, M. (2001) The Faustmann Model as a Special Case. Workshop 2001: Conservation and Sustainable Development-Comparative Perspectives, Yale Center for Comparative Research

Verhulst, Pierre-François (1838). “Notice sur la loi que la population poursuit dans son accroissement”, Correspondance mathématique et physique 10: 113–121.

For further reading:

European Forest Institute (n.d) Introduction to Forestry, Forest Policy and Economics. An open interactive Learning Source. Accessed March/2010.

Forest Europe (The Ministerial Conference on the Protection of Forests in Europe) Sustainable Forest Management Criteria & Indicators. Available at Last viewed November 11, 2012.

Gregory, R.G. (1987) Resource Economics for Foresters. John Wiley & Sons, Inc. New York.

Wang, S. (2004) One hundred faces of sustainable forest management. Forest Policy and Economics. 6(3-4): 205-213

This glossary entry is based on a contribution by Biljana Macura

EJOLT glossary editors: Hali Healy, Sylvia Lorek and Beatriz Rodríguez-Labajos

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