The Onceler has clear-cut a forest of Truffula trees and is considering replanting. If he replants, in 40 years he will have another stand of trees to harvest, and he will earn an (inflation adjusted) resource rent of $10 million. Replanting costs $1 million each year for 3 years. Onceler’s opportunity cost of capital is a mutual fund investment paying 6%.
1. Fill in the chart to determine if replanting is profitable.

2. If the Onceler does replant, then the Brown Barbaloots, Swamee Swans, and Humming Fish will come back due to the improved habitat. Beginning in 40 years, their populations will recover sufficiently to generate a flow of benefits (people enjoy recreating among these creatures) equal to $1 million per year forever. What discount rate should the neoclassical Department of Sustainability use to evaluate replanting today? Fill in the following chart to evaluate whether replanting and clear-cutting, replanting and not clear-cutting, or not replanting is potentially sustainable.

3. Suppose in this example that the benefits of clear-cutting and not replanting outweighed the costs. What must be true for that decision to be economically sustainable?

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Year 0 1 2 40 TOTAL Cost (S) 1m 1m 1m Benefit ($) 10m Discounted Cost (S) Discounted Benefit ($)