2. constant value tva

2.1 Threshold valuation principles

The opportunity cost suffered as a result of taking forest areas out of production for protection purposes is made up of lost producers’ and consumers’ surpluses. By excluding areas of forest from timber production, the overall supply of timber products is reduced. This results in the formation of a new market equilibrium. The price of timber products would rise and the level of output would decline. Those producers whose output is cut lose producer surplus. Consumers are also worse off¹. Their surplus declines because of the higher price paid and the reduction in quantity available. There are some off-setting gains. Those producers who maintain their access to production forests achieve higher prices for their products and so experience a rise in producers’ surplus.

2.2 Estimation of foregone producer surplus

The foregone producers’ surplus resulting from the reservation of forests is defined as the difference between the marginal costs of production and the price received for the units of output that would have been sourced from the reserved forests. The modelling of timber mill operations in the region carried out by Gillespie (1999) affords the estimation of the value of this opportunity cost.

The foregone producers’ surplus values for the forest scenario over a fifty year time horizon are reported in Table 1. Estimates under two discount rates (i) are reported.

2.3 Estimation of foregone consumer surplus

Bennett (1991) estimated the consumers’ surplus effects resulting from forest management options for Fraser Island. It was found that the lost consumers’ surplus ranged between 5 and 10% of the concurrent losses in producers’ surplus, depending on the degree to which the price of sawn timber could be expected to rise following supply reductions. On the basis of this result, lost consumers’ surpluses resulting from the protection scenario for the South Coast sub-region are reported in Table 2. All estimates are based on an assumption that consumers’ surplus losses are in the order of 8% of producers’ surplus losses.

2.4 The Threshold

Aggregating the lost producers’ (adjusted for profits expatriated overseas) and consumers’ surplus yields an estimate of the total surplus foregone due to the alternate forest usage. These estimates are presented in Table 3.

The data in Table 3 can be interpreted for each cell in the following manner. Using a discount rate of 5%, the present value of the cost to the Australian community that would result from the maintainence of current commitments is in the order of $441,000. In terms of the TVA, this implies that unless the community is judged to gain additional benefits of forest protection greater than $441,000, then timber extraction should be permitted to continue. The critical question facing the decision makers for this scenario (at a 5% discount rate) is therefore:

Is the present value to the community of the benefits of protecting the forests under this scenario worth more than $441,000?

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