Problem 4: Forest Policy [1.5 points]

Suppose the government would like to introduce a forest policy that delays the cutting of forests in order to have a larger volume of trees available for carbon sequestration. Specifically, the government would like to achieve the socially-optimal rotation interval, which considers the non-timber benefits of the forest, by introducing a severance tax on timber, which imposes a per-unit volume cost of on timber harvest.This means that the private net-present-value of all forest rotations is now:

NPV=D+_i=1 e^r(iT)[(p)Q(T)D]

=D + ((p)Q(T)D/(e^rT1))

4.A. [1 point] The government is considering three different values of the tax: = 0.563, = 0.825, or =0.987.Use Excel to determine which one gets the closest to achieving the socially-optimal rotation interval T.

4.B. [0.5 points] Suppose the government will pick the severance tax value that gets the closest to achieving the socially-optimal rotation interval T. Do you think that implementing this severance tax will achieve the goal of having a larger volume of trees available for carbon sequestration? Why or why not?