Is the Amazon Really a Market Failure?

A few weeks ago, I listened to a mildly confused episode of Freakonomics – the podcast run by journalist Stephen Dubner and Chicago economist Steven Levitt following their successful books in 2005 and 2009. The episode, hosted by Levitt, is humbly titled “The Simple Economics of Saving the Amazon Rain Forest,” and tries to make a common-sense economic case for protecting the forest from logging and burning.  

The basic case is this: the benefits to the rest of the world of an intact Amazon forest is much, much larger than the benefits that local ranchers and loggers gain from chopping down its trees. Whether you count bio-services like stored carbon and wildlife diversity or potential for ecotourism, the per-person benefits of a living forest far exceeds the per-person benefits to loggers. 

For these kinds of scenarios, the “simple” solution that economists propose is that those who value the forest alive pay those who have to give up their ability to log it: “The opportunity cost,” blasted Brazil’s environmental minister Ricardo Salles during the media storm of last year’s Amazon fires, “must be paid by someone.” Salles accused Western politicians and campaigners for wanting to meddle with internal Brazilian affairs without paying the price. 

Economists agree. If I value something of yours much more than you value it, it makes sense for us to trade: you give up something of lesser value to you such that I can gain something of greater value to me – and I reimburse you for your troubles. This tit-for-that happens every time you buy something at a grocery store, every time you go to work, every time you interact commercially with someone else. 

In principle, the economics of the Amazon is not much different. Here’s Levitt explaining the case for mutual gains:

“A hectare of Amazon land cleared for raising cattle […] sells for less than $1,000. With a social cost of carbon of $50 per ton of CO2 and the current best estimates of the carbon stored in the Amazon, each hectare of land preserved as forest is worth over $28,000 based on the carbon alone. That isn’t even putting a value on biodiversity or tourism. When land is worth almost 30 times more — to all of humankind — as forest, but instead people cut it down to grow cattle, that is the absolute definition of a market failure. A market failure with a very straightforward remedy.”

Even if the social cost of carbon were exaggerated several times over, the beneficial trade remains: a farmer gives up ten Benjamins’ worth of land in exchange for many more Benjamins from those who want the forest left standing. (For reference, the often-used price tag of $50 per ton of CO2 equivalents is roughly what the Obama Administration used when calculating the costs and benefits of environmental legislation). Sweden, with the world’s highest tax for carbon emissions, taxes a ton of carbon at around $130. At that kind of price, the value of carbon sequestered in the foliage and trunks of Amazonian trees far exceeds the value that farmers can get from crops or ranchers from cattle on that same patch of land. 

This seems like a good deal – what’s preventing us from going through with it, protecting the entire Amazon forest at reasonable prices (the entire 5,500,000 km² at even $1,500 per hectare would be roughly half of one percent of world GDP)? 

The economists and ecologists interviewed by Levitt in the Freakonomics episode declare that it’s a political problem of vested interests, complicated global agreements, and slow-moving bureaucracy. The episode itself – and Levitt explicitly – chalk it up to a “market failure.”

But so-called market failures are rarely a problem of the market, instead pointing to a problem of the political institutions that overrule what markets already do. In the case of the Amazon: a problem of enforcement and credible property rights. There is, in principle, nothing that prevents concerned Western donors from showering would-be Brazilian ranchers and farmers with cash such that they gladly abstain from chopping down that mesmerizing forest – indeed, Norwegian and German aid efforts have tried for years under various REDD programs (“Reducing Emissions from Deforestation and Degradation”). Rather, the problem is one of monitoring, enforcing, and ensuring that the agreement is kept. 

If making sure that the protected forest remains in place or legally defending the property right over some area is as difficult as it is in the remote Amazon, three major things can happen: payment recipients can negate and secretly chop some trees anyway, as the donor would never know; others, with or without the recipients’ knowledge, can pick up the logging slack from whoever the Norwegians and Germans managed to pay off; or the donors will back off when realizing that their protecting efforts are playing whack-a-mole in one of the most inaccessible areas of the planet. All lead to money-for-forest efforts cancelled (or limited in scope) and forests excessively logged. 

Economically, this is a simple case of social costs exceeding private benefits: A common-pool resource problem. Thankfully, economists have argued over these problems for decades – if not centuries – and Nobel prizes have been awarded for solving them. This is not, as the economists interviewed say, rocket science. 

Broadly speaking, three different avenues can solve common-pool resource problems:

1. Regulation: the powers of the state are used to determine and enforce how much may be used by whom.  
2. Privatization: where common ownership is replaced by individual owners who then reap the full benefit of the common pool resource. 
3. Community regulation, the idea for which Elinor Ostrom received the Nobel Prize in economics. Together with Vincent Ostrom, she showed that common-pool resources can be sustainably cared for by local users in small settings that have strong cultural affinity and shared norms of behavior. 

The Amazon forest lacks all three. And all require that the federal government (or local communities) can – or want to – uphold rules and defined property rights. In the vast expanse of the world’s largest rainforest, that was always a dubious prospect: the Amazon is simply too large and impenetrable to feasibly manage. 

First, the Bolsonaro government, elected on the back of agitated farmers, has said that it prefers industrial development over conservation and removed regulations and fines that prevented logging. Second, large parts of the Amazon – something like one-third to one-half – is unowned property, unallocated state or federally-owned land (and thus poorly monitored) or assigned to contacted or uncontacted indigenous tribes (thus again, poorly monitored and enforced as indigenous rights are routinely ignored). Third, the Amazon is so large and inhabited by such diverse tribes, cultures, and demographics that it hardly qualifies for the trust and repeat-interactions that an Ostrom-style self-regulating community requires. 

The vast majority of Amazonian deforestation happens on land directly controlled by Brazilian states or the federal government. Lots of research does suggest that privatization, or even protected national parks well-managed by governments, greatly reduce the amount and likelihood of deforestation. 

In Defense of Privatization

The textbook descriptions of “tragedy of the commons” and its various solutions often spout privatization to internalize external effects because it aligns individuals’ incentives with the common good. That means forest owners need to balance the immediate gains they can get from logging today against logging tomorrow. This is the textbook economic example of internalizing an externality, as farmers and fishermen carefully weigh today’s catch against depleting tomorrow’s. 

An owner cares about that. A regulator rarely does – and a participant on the edges of a commons to which he or she does not belong, most certainly does not. 

For the areas under questionable public stewardship, the Amazon effectively becomes a huge commons since bureaucrats in Brasília, Manaus or Belém – to say nothing about understaffed Ibama officials – are unable to responsibly protect the land or enforce property rights for it. Is an underpaid bureaucrat from Brasilia going to venture hundreds of miles through thick jungle, and inhospitable and treacherous riverways to verify that a certain piece of forest is in top condition, safe from the dangers of chainsaws and burnings? Hardly. Would an Oslo, Geneva, or Washington, D.C. charity do much better? Probably not. 

However, a local owner or logging corporation might – especially if his or her financial gains depended on the present and future well-being of the forest.

But all efforts above are moot points if property rights aren’t enforced. Foreign donors can waive Benjamins all they want, but without resources to monitor that recipients uphold their end of the bargain, and a legal system that punishes trespassers, efforts are for naught. Foreign ministers can lambast Bolsonaro all they want, but short of invading the Planalto Palace, there is little they can do. Any kind of internationally binding agreement that limits what Brazilians can do with their forests quickly becomes a foreign-interest problem where “your” property is no longer yours to use – and would play right into the pro-Bolsonaro conspiracies of Western meddling in Brazilian affairs.

A government strong enough to assign and enforce private property rights in remote areas wouldn’t have a problem with (excessive) deforestation in the first place. A government weak enough – or uninterested enough – that it’s unable to do so, couldn’t credibly abstain from chopping down trees, or promise that its citizens won’t do so either. 

Foreign donors paying farmers and ranchers not to deforest the Amazon requires the first set of conditions – where there isn’t much of a problem in the first place. The economists and ecologists that Levitt interviewed are correct that the deforestation of the Amazon is a political problem, but not that it’s a market failure. It’s a government failure to privatize and enforce commonly-held property – and it’s a government failure of mismanaged land under their stewardship. 

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