A Theoretical Analysis of Biodiversity Conservation and Competitiveness

This paper studies the relationship between biodiversity conservation in Northern boreal forests and its implications to the international competitiveness of the forest industry in an imperfectly competitive roundwood and goods markets. We start from the notion that conserving biodiversity, like preserving the key biotopes in all publicly and privately managed forests, leads to a decrease in the harvesting possibilities, and model the behavior of the domestic economy as a two-stage game. In the first stage the forest industry and the forest owners' association bargain about timber price. In the second stage the domestic industry unilaterally determines the use of production factors and thereby output in a Cournot rivalry with foreign forest industry. A binding biodiversity conservation requirement will increase the reservation price of timber for forest owners' association so that timber price goes up. This in turn weakens the international competitiveness of the domestic forest industry and leads to a decrease (an increase) in the market share of domestic (foreign) industry. Also a preliminary welfare analysis is carried out by assuming that the government maximizes the sum of producer and consumer surplus adjusted by the valuation of biodiversity.