70

CHAPTER 10

WHY SHOULD WE PAY FOR WHAT WE THROW AWAY?

Incentives for Efficiency from Pay-Per-Unit Pricing

People in the United States generate more than 236 million tons of trash each year.¹ U.S. citizens incinerate 17 percent of the trash from homes, small businesses, and municipalities, but even the resulting ash is more than landfills can handle. Among the results have been several infamous “tours de trash”—garbage barges wandering the seas in search of dumping grounds. In July 2002, one such journey ended sixteen years after it began. In 1986, operators of Philadelphia’s Roxborough incinerator could find no nearby home for more than 14,000 tons of toxic ash, so they loaded it onto a ship called the Khian Sea. The ship was turned away from ports in the Bahamas, Bermuda, the Dominican Republic, Honduras, Guinea-Bissau, and the Netherlands Antilles. In 1988, some 4,000 tons of the ash were unloaded on the beach in Haiti, the poorest country in the Western Hemisphere; the remainder was apparently dumped overboard as the ship sailed the Atlantic and Indian Oceans. After a decade of trying, Haiti succeeded in sending its 4,000-ton ash mountain back to Florida, and that state spent $614,000 shipping the ash by rail to Maryland. From there it was trucked to the Mountain View landfill in Montgomery, Pennsylvania—only 170 miles from where it had started. The lesson: What goes around comes around. This chapter explains incentive structures that discourage people from sending so much trash around.

¹ See www.epa.gov/epaoswer/non-hw/muncpl/facts.htm.

71

The trouble with trash begins with a loophole in the limits that prevent us from overindulging. Chapter 9 introduced the concept of a budget constraint, which holds within it all the combinations of various goods that one can afford. A budget constraint is essentially a barrier between you and the unlimited quantities of goods and services that you might consume if money were no object. The barrier is usually impenetrable, but exceptions exist. The Jumbo Buffet restaurant in Troy, Michigan, provides an unlimited number of trips to the 100-plus-item buffet at $6.25 for lunch and $12.99 for dinner. Having paid the price, customers have no constraint on their consumption of food beyond the size of their stomachs. The financial barrier between them and mass consumption is erased, and consume they do.

There’s a twist in the budget constraint story whenever consumers can enjoy more of 1 good without giving something up, and all-you-can-eat restaurants aren’t the only example. If you live in a residence hall, you may pay a fixed price for water and electricity that is independent of your level of use. Disney World and other amusement parks now charge a fixed price for unlimited rides. Professors at many colleges enjoy unlimited use of copy machines. Internet access increasingly comes at a fixed monthly price for unlimited use. Traditional garbage pickup is a fixed-rate service, too. One benefit from these price plans is simplicity; there is no need to monitor the level of use.

A problem with “all-you-can” offerings is that they lead to overconsumption. After paying the fixed price, the cost of 1 more becomes 0. This encourages the rational consumer to consume until the marginal benefit equals the 0 marginal cost to the consumer. Do you ever leave the water running while you brush your teeth? Are 0-marginal-cost music downloads clogging your 0-marginal-cost Internet bandwidth? Although the marginal cost of these activities to the user may be 0, the marginal cost to others is not. Efficient consumption ends when the marginal benefit falls to the level of the marginal cost to society. By consuming right up to the point at which the marginal benefit is 0, you, as a consumer, use up goods and services that aren’t worth their cost to society, and thereby impose an undue burden on others, if not yourself. That is, if you eat like a bird in the all-you-can-eat cafeteria, you’re subsidizing the human food receptacle sitting next to you. The next section explains policy implications in the context of the plastic trash receptacle sitting in your garage.

Although virtually all forms of waste could be either recycled or composted (placed in a bin where it would turn back into soil), the average American creates 4.5 pounds of garbage daily.² Citizens of most other countries throw away less than us, but they’re starting to catch up. According to the Environmental Protection Agency (EPA), 61 percent of our garbage is paper, plastic, metal, or glass and could be recycled; 23 percent is food scraps and yard trimmings, which could be composted; and 16 percent is wood, rubber, leather, textiles, and miscellaneous other materials that are somewhat harder (though not impossible) to eliminate from the waste stream. If people unfailingly recycled and composted, 84 percent of the waste disposal issue would disappear.

² See www.epa.gov/epaoswer/non-hw/muncpl/facts.htm.

72

In 500 B.C.E., the city of Athens, Greece, organized the first municipal dump in the Western world. Athenians were required to dispose of their waste at least 1 mile from the city’s walls, and the long haul provided a distinct downside to waste creation. U.S. city dwellers of the nineteenth century invited pigs, rats, cockroaches, and disease by throwing refuse into the streets, or went through the trouble of digging pits to hold their garbage. In 1895, New York City unveiled the first system for public garbage management in the United States.³ Modern curbside garbage pickup is a luxury that presents a lamentable incentive problem. The pricing plans for garbage collection often resemble those at all-you-can-eat restaurants but in reverse. Whereas the restaurants allow customers to take in as much food as they want for a flat price, many garbage services allow customers to set out as much garbage as they want for a flat fee. For example, residents of Brazil, Indiana, pay the city $8.50 for curbside pickup of all their trash, including heavy items and recyclables. Under this plan, a household doesn’t pay more when it throws away more. Thus, there is no incentive to conserve, reuse, compost, or recycle, even when it would be easy to do so.

³ See www.epa.gov/epaoswer/non-hw/muncpl/timeline_alt.htm.

Per-unit pricing is the solution to the flat-fee blues. For instance, the city of Pemberville, Ohio, charges 75 cents per bag of trash left at the curb. In other communities the per-bag fees range from 50 cents to $3.25. Participants in this type of “pay-as-you-throw” (PAYT) program purchase specially marked trash bags (or stickers to place on their own bags) to indicate to the garbage collectors that they have paid for each unit of trash picked up. The more they throw away, the more they must pay. This pricing structure creates a trade-off between discarding more trash and purchasing goods and services, effectively resurrecting a budget constraint for trash. The programs also introduce an element of fairness. Whereas light users subsidize heavy users under fixed-rate systems, per-unit pricing requires participants to pay more for higher levels of use.

According to the EPA, the implementation of PAYT programs reduces community waste levels by 14 to 27 percent and increases recycling rates by 32 to 59 percent.⁴ The EPA estimates that for the average PAYT participant, annual emissions of greenhouse gases are reduced by 0.085 metric tons of carbon equivalent (a standard measure of climate-changing greenhouse gases). The success of pay-as-you-throw programs relative to all-you-can-waste arrangements suggests that consumers do make choices with attention to their budget constraints and that incentives do indeed matter. Pay-as-you-throw programs have been adopted in roughly 6,000 of the 19,429 U.S. cities, as well as in Germany, Austria, Sweden, and the Netherlands. In 2005, Ireland enacted a nationwide mandate for local authorities and private waste haulers to restructure their billing to reward waste reduction by charging consumers according to the weight of their trash.

⁴ See www.epa.gov/epaoswer/non-hw/muncpl/ghg/climpayt.pdf. For related research, see http://web.utk.edu/,dfolz/payt.pdf.

73

The logic behind per-unit pricing for trash is applicable to myriad situations involving insufficient constraints. For example, incentive-minded Ireland was the first country in the world to combat a glut of plastic shopping bags with a per-unit bag tax. The result was a 90 percent reduction in plastic bag use.⁵ Ireland also taxes polystyrene food wrappers and cash machine receipts, with revenues earmarked to fund trash cleanup and recycling centers. Some countries, including South Africa and Bangladesh, have banned disposable plastic shopping bags altogether, but per-unit charges can be more efficient because they allow those who receive large benefits from plastic bags to keep using them.

⁵ See www.epa.gov/epaoswer/non-hw/payt/tools/bulletin/spring-04.htm.

Toll roads that charge according to the distance driven help limit congestion, and technology is making pay-as-you-go driving more feasible. The United Kingdom is considering proposals to install boxes in cars that allow satellites to track their exact location and mileage.⁶ If the plan is adopted, charges will vary from $0.03 per mile in rural areas to almost $2 per mile in big cities during rush hour. Distance-based driving charges are attractive as a means of assessing larger costs on drivers who use the roads more.

⁶ See http://news.bbc.co.uk/1/hi/uk/4610755.stm.

Sometimes there are good reasons to overlook pay-per-unit pricing plans. Many citizens understandably dislike the prospect of having the government know when, where, and how fast they are driving at all times, as pay-as-you-go driving would allow. Unrestricted consumption is also easier to administer. With a simple entry fee, amusement parks don’t need a ticket taker at every ride. And by offering all-you-can-eat buffets, many restaurants find that they can save enough money on wait staff to offset the cost of higher food consumption levels.

Households, businesses, and institutions produce about 230 million tons of garbage each year. For efficiency, people should carry out each activity until the marginal benefit no longer exceeds the marginal cost. When the marginal cost to an individual of creating waste is 0, as it is in traditional garbage pickup systems, it is rational for that individual to go on generating waste until the marginal benefit of any more waste is 0. If it takes an iota of energy to reduce, reuse, or recycle, the individual has little incentive to conserve resources because the alternative—neglect—is free. Because society pays high costs for waste disposal even when individuals do not, 0-marginal-cost garbage pickup programs encourage inefficiently high levels of waste production. A solution is to charge for garbage disposal according to volume. If the price of discarding each bag of garbage were set to resemble the cost that dealing with that bag of garbage imposes on society, people would generate more waste only if the benefits of doing so exceeded the costs, and efficiency would result. Similar variable-cost pricing structures improve the efficiency of water, electricity, copy machine use, music downloads, and factory emissions, to mention a few examples.