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1Resource Assessment Commission, Locked Bag No. 1, Queen Victoria Terrace, Canberra, Australian Capital Territory, Australia 2600.

This chapter reviews recent developments in the economics of the environment with special reference to forest fauna. While economics can make a substantial contribution to broad land-use decisions, it is less useful in day-to-day management decisions.

Efficient allocation of resources by private markets breaks down when confronted by public goods or goods with large externalities such as clean air, national defence and forest fauna.

Cost-benefit analysis is a public decision-making mechanism designed to account for all of the economic values associated with a particular resource use. In addition to the usual commercial values, extended cost-benefit analysis tries to take account of the less tangible non-use values such as existence value and option value. Several techniques, such as contingent valuation, have been developed to measure the latter. There is a range of practical and philosophical difficulties with these measures, but they can still provide useful information.

The property rights approach to the environment argues that public goods, such as forest fauna, can be privatized and can then be traded in markets. Advocates of this approach believe that effective definition and enforcement of property rights will overcome environmental problems because people’s preferences will be reflected in market prices. A range of practical and philosophical objections to this approach is canvassed.

We conclude by arguing that good economic analysis can significantly improve our ability to manage forest resources in a wise and sustainable manner.

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