Abstract
This paper identifies technical economic flaws in the typical economic analysis used to justify deforestation (logging) projects in tropical forests. Forest exploitation has negative externalities (ranging from effects on forest dwellers to possible climatic change). In conventional economic analysis, these may he offset by the benefits of reinvesting revenues. However, ploughing profits into further logging finally exhausts the resource, and the long-term reinvestment assumptions of the standard measure of a project's merits (IRR) are not met. Not all revenues are available for reinvestment elsewhere in the economy, and those which are available may not be reinvested. Shadow pricing in social cost-benefit analysis frequently assumes reinvestment of all project revenues, and thereby tends to favour logging. Realistic assumptions produce different conclusions. The economic case for deforestation is also sensitive to the distribution of consumption financed from project revenues.
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