Tropical deforestation is a serious environmental problem. Consider a situation where a developing country (country A) values its tropical forests solely for the one-time timber benefits and the value of agricultural production occurring on the land cleared of the forest. Concerned citizens in a developed country (country B), however, value the preservation of tropical forests. Suppose that aggregate timber and agricultural value country A enjoys when the forests are cut down is $200 million, while citizens of country B value the preservation of forests at $500 million.
a) What is the efficient outcome: to cut or preserve the forest?
b) Assuming country A has control over its natural resources, and in the absence of any communication between countries A and B, what will the outcome be?
c) If country A and citizens of B could effectively negotiate, what might the outcome be?
Country B will pay country A $400 million, and the forest will be preserved.
Country A will pay country B $200 million and the forest will be cut.
Country A will pay country B $600 million and the forest will be cut.
Country B will pay country A $600 million, and the forest will be preserved.
d) If the government of B uses its political power to stop country A from clearing the forests, is the outcome efficient?