Two-Part Tax Controls for Forest Density and Rotation Time

Many forest amenities are derived not only from the age of the trees, but also from the density of the trees. When an externality such as erosion control is considered, clear-cutting results in much larger damages than occur with selective cutting. This paper extends current methodology, allowing firms to optimize over both rotation time and the commercial use percentage per acre. A two-part instrument, a “"clear-cut”" tax combined with a lump sum “"licensing fee"”, controls for commercial use percentage and rotation time in a firm that does not internalize non-timber benefits. Optimal taxes are presented that correct the firm’'s suboptimal behavior. A two-part instrument is shown to remedy market failure when a private firm clear-cuts and harvests too soon, and when an overgrown forest is not privately optimal to maintain. Numerical analysis on a simple case, simulating a forest where the externality is erosion control shows the clear-cut tax policy'’s relevance for a variety of erosion severity scenarios and interest rates.