Market Failures

Topics: Forest, Slash and burn, Secondary forest Pages: 4 (653 words) Published: March 24, 2013
L185 Block 4 Session 4

Text 4.2
Market failures
[Paragraph 1] Deforestation and forest degradation are ultimately the result of decisions by agents such as private entrepreneurs, corporations, shifted cultivators and communities. Generally, the main agents in the process of deforestation and forest degradation belong to the private sector. An underlying cause of deforestation is the discrepancy between the values of these private agents and those of society. Because of this, the satisfaction of the agent’s objectives may be in conflict with the satisfaction of society’s objectives.

[Paragraph 2] A distinction must be made between the values accruing as a consequence of deforestation and forest degradation to the agent and those accruing to society generally. Society may be a region, a nation, or the world in general. Values of private agents and those of society as a whole are likely to diverge for several reasons. Many of the services provided by forests (as well as some of the costs of mismanaging these resources) have no market price and therefore do not enter into the decisions of private sector actors. For example, a forest landowner in an upper watershed does not get paid for the services his forest provides to downstream fishermen and farmers. These values, including protection of soil against erosion and irrigation and hydropower dams against sedimentation, can be substantial to downstream operators.

[Paragraph 3] Nor does the landowner obtain commercial profits for capturing carbon, maintaining scenic beauty or for preserving biodiversity resources. The forest landowner has little incentive to take these benefits into account and therefore the production of these environmental services will be less than if he could sell them and receive a financial reward. In all cases where the forest landowner does not obtain the full value of social benefits provided by forests, there will be less incentive to maintain lands under forest cover. The market fails...
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