differences having major impacts on the outcomes (“butterfly effects”). Thus the predictive power of such models is limited by their very nature.

Yet, in empirical studies IRS effects can be strong, and need to be considered. There is a dangerous “fallacy of average” (Verburg et al., 2002), i.e., there are threshold effects and non-linearities which sometimes give surprising outcomes. Many of the deforestation stories observed can only be understood by considering IRS effects, e.g., the recent soybean expansion in Brazil and Bolivia (Kaimowitz and Smith, 2001).

Consider an exogenous increase in rent land of the extensive agricultural sector. The sector expands: output increase and people move to the region. This may have several reinforcing effects that further increase the land rent, of which two are particularly important.

First, a larger population leads to the development of better infrastructure (e.g., feeder roads), local markets and public services. This can boost the (absolute) farm-gate prices of agricultural commodities, both by reducing transport costs and increasing local demand. Lower prices of _imported_ consumer goods can also be expected due to lower transport costs and higher competition, further increasing the _relative_ price of agricultural commodities.

Second, higher output can lead to the development of downstream activities in both agriculture and forestry, e.g., food processing, slaughterhouses, dairies, and mills. Such activities are characterized by IRS: a minimum supply of raw materials and products are needed to make them profitable. Similarly, the establishment of marketing and transport systems, inputs supplies, and extension services are also characterized by IRS.

In short, an exogenous increase in the land rent initiates processes which further increase profitability by increasing output prices and reducing input costs. We discuss further such reinforcing loops and their role in the forest transition in section 3.2.

# **_2.2.6 Forest scarcity feedbacks_**

An increase in agricultural land rent is the key driving force behind deforestation. This will reduce forest area in the early stages of the forest transition, and most likely also the supply of forest products and forest-based environmental services. We briefly discuss two major feedbacks the reduction in each of these may generate.

Reduced supply of forest products might lead to an increase in their prices. This is a type of general equilibrium effect discussed in section 2.2.1. The magnitude depends on the actual reduction in the supply (e.g., to what extent is logging moving to new areas as the agricultural frontier expands), the demand elasticity, and the market share. As will be discussed further in section 3 on the forest transition, such increases in forest product prices provide a very important feedback that helps to stabilize forest cover.

Reduced supply of forest-based environmental services should also increase the value of such services. Due to their public goods nature, most of these do not have any market and therefore no market mechanisms that will raise forest rent (unlike for forest _products_ ). There are exceptions, such as forest based tourism and emerging markets for environmental services related to particularly water catchment services.<sup>17</sup> In the absence of markets for a number of forest products, the main response is, therefore, likely to be political in the form of efforts to protect forests to maintain the services provided. Programs for tree planting, forest conservation areas, and devolution of forest management to local communities

> 17 For reviews of PES markets, see Landell-Mills and Porras (2002), and Wunder (2005) for a didactic introduction to PES and more references.

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