The effects of the risk of fire on the optimal rotation of a forest

The effects of the risk of fire or other unpredictable catastrophe on the optimal rotation period of a forest stand are investigated. It is demonstrated that when fires occur in a time-independent Poisson process, and cause total destruction, the policy effect of the fire risk is equivalent to adding a premium to the discount rate that would be operative in a risk-free environment. Other cases are also investigated and in each a modified form of the Faustmann formula is derived and a “marginal” economic interpretation given.