2. Market failure and creation: a conceptual framework

Forest goods and services benefit both local and global communities, but not all forest uses generate financial returns commensurate with their “true” economic value. This is because several forest benefits, notably environmental services, are not traded in markets and have no observable price. There are many reasons why markets often fail to reflect environmental values. This section starts by describing why markets may fail in the case of forest environmental services before outlining how government initiatives to tackle market failure have evolved over time. Emphasis is placed on the rapid adoption of market-based approaches in forestry sectors around the world and, in particular, growing interest in the potential for market creation to overcome market failure. Interest in market creation is, however, proceeding ahead of any systematic analysis of the costs and benefits of these initiatives. The discussion draws on recent advances in New Institutional Economics and thinking on forests and poverty to inform the development of a conceptual framework to guide research.