Nick Smith is the bag man

It’s great to see the government taking economic incentives seriously. Their latest initiative considers imposing a 5c/bag tariff on plastic bags in supermarkets. The idea is that the market price for the bags doesn’t take into account the full environmental cost of non-biodegradable bags. By taxing the bags the government can adjust the market price of the bags to match their social cost.

What gets me so excited about it is that green regulations usually seem to take the form of rather arbitrary quotas and limits. A look at the Green’s manifesto reveals how preferable direct control is to them. This is an excellent example of a political party trusting economic incentive instruments to do the job. Nick Smith says,

I don’t see this is as some sort of cash cow, what’s important is changing consumer behaviour.

Music to my ears! The one concern I might have is whether there is an externality at all. If consumers pay for their rubbish, the rubbish company pays for landfill space and the landfill pays for any environmental harm it creates then where’s the inefficiency? I would guess, without actually knowing, that not all of these things hold in most places. As a consequence, taxing the bags might be the easiest way to get us closer to an efficient outcome.

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  • Although as Paul Henry pointed out on Breakfast this morning, there is a positive extrnality in that people use plastic bags to clean up their dog poo when they take their dogs for a walk:)

  • The only possible externality is from bags that are left to blow in the wind, either littering the streets or blowing out to sea. A quick look out the window suggests that plastic bags are the least of our litter problems, at least in Christchurch. Broken beer bottles or RTD bottles would be first on the list, followed by dog poo, then sale fliers that have blown out of mailboxes.

    Ridiculous policy motivated not by any real externality problems but rather by wanting to be seen to be doing “something” about the environment.

  • @Eric Crampton
    I do have concerns about whether there is an externality, but I’m not yet convinced either way. Does the landfill pay the full social cost associated with storing waste? Will production be optimal given that consumers face zero marginal cost from consuming plastic bags? I’m sure the answer to that second question is fairly obvious, but it doesn’t spring out at me right now.

    On the whole, I’m glad to see the government even try to do something about environmental issues and do it via Pigouvian taxes. I hope that is a precedent they intend to follow, though it would be nice if they focussed on more important problems in future. Baby steps 🙂

  • The only social costs associated with waste storage that are over and above the private costs paid for land are effluent that pollutes waterways, smell that offends neighbors, and things that blow out of the tip. It’s possible that plastic bags blow out of the tip more than do other things, but I can’t see them having anything to do with the main possible external costs. The one potentially relevant externality is relatively easily mitigated: fences around the tip.

    I have big worries about things that aren’t really the causes of external harm being gussied up as though they do so that taxes can be imposed on them with the mantle of economic science as justification. Like the case with fat taxes and fiscal externalities. It’s just paternalism, and I far prefer an honest paternalistic argument to one that uses the language of economics to make it seem as though it’s something else.

  • Looks like it won’t be happening.

    I don’t quite get why plastic bags have become such a salient thing for environmentalists to attack. I think it has more to do with a general anti-consumption mindset (i.e. we’re using too many resources and will soon run out) than with any perceived externalities. There are plenty of environmentalists who claim that we should only consume what we really need, and nobody ever really needs a plastic bag. They’re a symbol of frivolous convenience and must be eliminated in the name of a spartan approach to sustainability.

  • I’m glad Key took the idea to school. Organisations are voluntarily moving towards charging for plastic bags where they see fit (see Borders, Warehouse) – I see no compelling case for compulsion.

  • @Eric Crampton
    I certainly agree that people often call something an externality when it’s not, just to support thier desire to tax it. The thing I still don’t get about plastic bags is that, when you make a bag consumption decision at the supermarket, you face a MC of zero. Obviously the cost of consuming a bag isn’t zero, so the price consumers face isn’t the MC. How then can the quantity consumed be optimal?

    @ Brad Taylor
    There certainly are a lot of people like that; but, as Eric said, it’s OK as long as they make their value judgements clear. (I think I’m channelling Matt here!)

    @ goonix

    I guess these are just marketing measures to greenwash their businesses. If there’s no case for compulsion then they’re not helping the planet by charging. If they is an externality problem then the idea of solving it via voluntary measures would be a bit ridiculous.

  • @rauparaha

    Fundamentally I don’t see the problem with charging a small amount for a bag (much like you would charge for any other good or service). So if there is no externality, and some consumers are forced to pay a small fee for the convenience of a bag as businesses try to look environmentally friendly, I have no problem. Who knows, consumers might even score some utils off it too. 😛

    If there is an externality, and businesses gradually migrate voluntarily to charging for bags, as seems to be the case, compulsion seems to be a bit heavy handed and unnecessary.

    Either way, I see no need for the government to direct businesses w.r.t bags.

  • @rauparaha
    “The thing I still don’t get about plastic bags is that, when you make a bag consumption decision at the supermarket, you face a MC of zero. Obviously the cost of consuming a bag isn’t zero, so the price consumers face isn’t the MC. How then can the quantity consumed be optimal?”

    There are plenty of things which businesses don’t charge consumers for at the margin. Absent a compelling externality argument, the cost of bags are internal to the business, which would charge for them if it were worth the transaction cost. Do you also think the government should tax salt sachets at restaurants, on the grounds that consumers face a marginal cost of zero and consumption will not be optimal?

  • @Brad Taylor
    I think it depends on the social vs private cost of having ‘too many’ of the item. If we think there will be a significant environmental cost to having far too many bags floating around then maybe it is a problem that businesses don’t charge for marginal bags. It may not be a problem for the business but it may be a problem that the government wants to fix. The cost of the bags is internal to the business, but it’s not the business that makes the final consumption decision, it’s the buyer.

    I’m still not sure how I feel about this, but I just don’t think I have a good enough grip on it yet to be confident that there’s no reason for intervention.

  • Eric Crampton

    There may well be a potential negative externality; I just can’t buy that it’s a pareto-relevant one. It’s important to make that distinction. Buchanan-Stubblebine 1962.

  • @rauparaha

    Surely the fact that consumers don’t pay the marginal private cost of bags is largely irrelevant. The cost of bags to supermarkets has to be pretty close to zero, since they don’t find it worthwhile to charge for them. As things stand, the business doesn’t make the final consumption decision, but it could if it so chose. The relevant consideration is the difference between marginal private and social cost. I doubt that the difference between zero and the marginal private cost of bags is high enough to be policy-relevant. You need to specify some significant externality to even begin to justify intervention. Even then, I don’t see how the MC to shoppers should come into it. Shouldn’t it be enough that supermarkets pay the full MC of bags, without being forced to charge consumers if the transaction costs remain prohibitively high?

  • @ Eric

    I am not familiar with that paper, but I have printed it out now so I’ll have a think over it, thanks.

    @ Brad

    I’m not sure it is irrelevant, but I need to think it over more before I’m certain. My initial thought is that it is consumer decisions which determine demand for bags and they face zero MC when MSC is non-zero. Since overseas experience shows demand to be highly elastic, that could be a significant difference which would suggest that social costs are not internalised.

    However, the argument that supermarkets face that MC and determine how much to buy still nags at me. I just haven’t yet had that flash of understanding where it all becomes clear!

  • There is obviously a lot to discover about this subject. I agree with most of the points raised though.

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