LIDS Sustainability Tea Talk

“Pricing for Preservation: Aligning Sustainability and Welfare in Forest Management”

We address the challenge of promoting sustainable practices in production forests managed by strategic entities (agents) that harvest agricultural commodities under concession agreements. These entities engage in activities that either follow sustainable production practices or expand into protected forests for agricultural growth, which leads to unsustainable production. Our study uses a network game model to design optimal pricing policies that incentivize sustainability and discourage environmentally harmful practices. Specifically, we model interactions between agents, capturing both intra-activity (within a single activity) and cross-activity (between sustainable and unsustainable practices) influences on agent behavior. We solve the problem of maximizing welfare while adhering to budgetary and environmental constraints, particularly, limiting the total unsustainable effort across all agents. Although this problem is NP-hard in general, we derive closed-form solutions for various realistic scenarios, including cases with regionally uniform pricing and the use of sustainability premiums or penalties. Remarkably, we find that we can achieve both welfare improvement and reduction in unsustainable practices without reducing any agent’s utility, even when there is no external budget for increasing premiums. We also introduce a novel node centrality measure to identify key agents whose decisions most influence the aggregate level of unsustainable effort. Empirical validation confirms our theoretical findings, offering actionable insights for policymakers and businesses aiming to promote sustainable resource management in agricultural commodity markets. Our work has broader implications for addressing sustainability challenges in the presence of network effects, offering a framework for designing incentive structures that align economic objectives with environmental stewardship.