Contribution of Agriculture to Deforestation in the Tropics: A Theoretical Investigation

Abstract

This paper compares the deforestation path taken by profit maximizing agricultural firms in tropical regions to the path that will maximize social welfare based on optimal control techniques. We set up a theoretical problem where the socially optimal deforestation path that maximizes the discounted sum of net benefit of forest land use to society diverges from that of a farmer. We arrived at this conclusion after solving for the optimal choice of deforestation for both the private farmer and a social planner. The key source of this divergence in deforestation path is that the cost of deforestation is external to the farmer. The paper concluded that the farmer’s deforestation path leads to socially suboptimal outcome. Fiscal policy measures and public ownerships are recommended to deal with externalities that are inherent in forest land use.

Keywords: Agriculture, Deforestation, Optimal control