Waste

Extract C (lines 17–19) states: ‘Many environmental economists suggest

that making firms pay for the costs of landfill associated with their
products, or taxing raw material inputs, will be necessary to ensure a
sustainable future for all.’

Using the extracts and your knowledge of economics, evaluate

policies, if any, that governments in developed countries should
pursue to reduce waste and encourage the recycling of waste
products. [25 marks]

Waste is an example of environmental market failure, an inefficient

allocation of land resources caused by negative externalities in
production. Goods associated with waste are over-provided in a free
market system. Such a market failure is possible justification for
government intervention if it creates a net social benefit. In order to
create such a benefit, governments of developed countries should
pursue policies to reduce waste and encourage recycling of waste
products. Policies of taxing landfill and raw material inputs, and
subsidising recycling schemes are required, as well as education of the
public to encourage changes in consumer behaviour.

Figure 1: The market may solve problems of resource depletion

An argument that governments should not pursue any policies at all to

reduce waste and encouraging recycling of waste products is that, over
time, the market will solve the problem. For example, as raw material
inputs become depleted, their supply reduces (S1 to S2 in Figure 1).
This creates an excess demand at the original price of P1, resulting in
upwards pressure on price. The resulting price rise to P2 is an example
of the rationing function of prices: There is a contraction of demand from
Q1 to Q2 as the market adjusts to its new equilibrium and those who
value raw material inputs most will be the ones who use them. The price
rise also signals the increasing scarcity of raw material inputs and
incentivises changes of behaviour. For example, the increasing price of
raw material inputs makes recycled inputs more attractive as a
substitute, leading to an increase in demand for them. This will
encourage greater activity in the market for recycled products with an
extension of supply.

There is also some real-world evidence to support the idea that markets
can solve the problem. For example, Extract C speaks of online market
places for recycled materials growing rapidly, and says that “recycled
materials now flow to the highest bidder”. Having said this, there are a
number of considerations that point towards a need for government
intervention. Firstly, the changes outlined in Extract C have occurred
partly in response to intervention by governments in the form of
regulation, not purely of the market’s own accord. Secondly, change
does not seem to be fast enough. Indeed, market forces may not cause
the price of raw material inputs to rise sharply until it is too late to
develop alternatives. Even if market forces eventually slow down
resource depletion, this fails to solve the problem that significant
resource degradation is occurring in the meantime as waste products
are sent to landfill or dumped in the oceans. These considerations,
taken together, create a strong case for government intervention. This is
especially so as “by 2050 the world will have 2 billion more consumers,
increasing the pressure on the environment”. Furthermore, fears that
encouraging reduction of waste and increased recycling will be against
the interests of developed economies seem unfounded as “the UN
suggests that better use of resources could add $2tn to the global
economy by 2050” and recycling generates 20 times as many jobs per
1000 tonnes as waste disposal. While firms involved in waste disposal
may lose out through government intervention, this will be more than
outweighed by the gains in the recycling sector. In interim judgement,
there is a strong case for the governments of developed countries to
consider policy intervention to reduce waste and encourage recycling of
waste products.
One policy open to the governments of developed economies is “making
firms pay for the costs of landfill, or taxing raw material inputs”. The aim
of such a tax would be to raise the costs of production of firms, thus
reducing the profit margins in supplying raw material inputs. Firms
would be forced to pay the full social cost of production (MSC in Figure
2) rather than just the private costs (MPC) and would no longer be able
to impose externalities on third parties without paying a price that reflects
this. The resulting reduction in supply from S1 to S2 would restore
provision to the social optimal level of Q*, thus correcting the market
failure.

Figure 2: Taxing raw material inputs

The policy of taxing raw material inputs has many advantages. One of
these is that it raises revenue for the government (equal to the combined
shaded areas in Figure 2). This is a benefit of itself but also suggests the
possibility that the government could hypothecate the tax, setting it aside
to be spent on subsidies of recycling schemes and green technologies.
The combination of these two policies could create powerful incentives
for more environmentally friendly behaviour. Moreover, the tax is in line
with the “polluter pays principle” in that those who are consuming raw
material inputs and degrading the environment with waste are jointly the
consumers and firms involved in the activity. It could be seen as fair
that, together, these groups bear the burden of the tax, with the
consumer facing a price increase from P1 to P* and the firm absorbing
the remainder of the unit tax. Furthermore, it could be argued that
demand for raw material inputs may be quite elastic, as increasingly
there are good substitutes available in the form of recycled inputs. This
makes the policy more effective in encouraging a contraction of demand
for raw material inputs. Indeed, it may be the case that demand
contracts more than proportionately to any price increase. The policy is
not without its problems, chiefly that externalities are difficult to value
and there is an information problem so that the government does not
know exactly at what level to set the unit tax. It is also problematic if the
government in any one country imposes environmental taxes in isolation.
This is because if costs of production for firms in any one country rise,
this may produce the unintended consequence of incentivising them to
relocate to other countries where raw material inputs are not taxed and
where they can produce waste more freely. Overall, though, the
possibility of government failure seems small and evidence supports the
effectiveness of taxes of this kind. When the UK government introduced
a 5p tax on plastic bags in 2015, official data showed that their use fell
by 85% in the following year. In interim judgement therefore,
governments in developed countries should tax landfill and raw material
inputs, while subsidising recycling and environmentally friendly
production methods.

A further policy that governments in developed countries may pursue is

to educate the public about the impact of waste, providing information
with the aim of encouraging a change in consumer habits towards re-
using and repairing products rather than disposing of them. If
consumers are better aware of the impact of their activities on 3rd parties,
they may take this into account. If demand for products that are
designed not to last long falls, then their price may be expected to fall
too, and firms making such products will be less profitable. The impact
would be to reduce waste and to improve the efficiency of resource
allocation.

The effectiveness of a policy of information provision may be questioned

on the grounds of economic theory. In traditional theory, it is standard to
assume that consumers are rational utility maximisers. If this
assumption were true, it would mean that they take no account of the
impact of their actions on third parties, even if they are aware of the
impact. There seems to be plenty of reason to reject this assumption,
however. Anecdotal evidence suggests significant changes in consumer
behaviour as a result of the effects of plastic waste being shown clearly
in the BBC’s Blue Planet programme. Behavioural economics
incorporates more realistic assumptions about human behaviour,
including the idea that people respond to social incentives, not merely to
monetary ones. The effectiveness of the UK’s plastic bag tax may be
largely explained by the fact that the tax helps to make single use bags
socially unacceptable. The spread of greater information could well
have the same effect. As the government is able to provide information
at a relatively low cost, it seems very likely that it could achieve a net
social benefit by doing so. In interim judgement, governments in
developed countries should consider allocating expenditure to educating
the public about the effects of environmental waste.

In conclusion, governments of developed countries should pursue

policies to reduce waste and encourage the recycling of waste products.
This is because the market cannot possibly tackle existing problems of
resource allocation with sufficient speed. Both economic theory and
real-world evidence support the idea that the government can provide a
net social benefit by taxing landfill and raw material inputs while
subsidising recycling. While traditional economic theory would reject the
idea that educating the public about the effects of waste would be
effective, real-world evidence and behavioural economic theory suggests
otherwise. Even regulation, often rejected by economists as a “blunt
tool” for dealing with environmental problems may have a role to play in
combination with these policies. For the policies to be most effective,
they should be coordinated between as many governments as possible,
both of developed and developing countries. In the end, evidence
suggests that intervention is likely to be the benefit of all, given the $2tn
gain to the global economy by 2050 suggested by UN modelling.