RES Essay Competition Dan Gilbey

Does economics have the answer for the global problem of plastics pollution?

Part I – Does Economics have the Solution to the Global Problem of Plastics Pollution?

To best answer this question, we must, perhaps, look at possible answers under the following criteria:

1. Can the policy be implemented on a global scale?

2. Does the policy only reduce future consumption, without reversing the effects of past and present consumption, and vice versa?

3. How sustainable is the solution, and does it cause unwanted and unintended negative consequences?

In its most basic form, the problem is external costs(1). We can internalise these by appealing to people’s sentiments, or, as this essay will focus on, appealing to pockets and using price systems to influence market signals. Coase argued that market failures(2) occur because of a lack of sufficient property rights and high transaction costs, which would otherwise lead to a ‘fair’ allocation of resources (Coase, 1960). If we can establish comprehensive property rights in transactions, and reduce transaction costs, we can eliminate the market failure as economic agents will interact with each other to yield a socially optimal level of consumption and production. This is already being used in the form of tradeable  permits(1),such as the EU Emission Trading Scheme. A central authority determines the ‘safe’ maximum level of pollution, issuing permits which limit the amount of pollution that can be produced in an area. Though only currently being used for emissions pollution, such as SO2, a similar system could be established for plastics. Permits force those involved in the transaction to ‘internalise’ the external cost of pollution. Maximising the effect of this solution, requires finding the major sources of plastic pollution. These are:

Alternatively, we could find another solution by using Pigou’s explanation of the problem of externalities. Because external effects are not accounted for in production costs or individual utility functions, they are also not subsequently reflected in product pricing (Pigou, 1933), meaning plastics are too cheap both to make and buy, therefore becoming both over-produced and over-consumed. We could, therefore, consider imposing Pigouvian taxes on plastics. Not only would these reduce the supply of plastics as their production costs become higher, but it would also reduce the quantity of plastics demanded, as consumers move away from pricier plastic-heavy products, e.g. in the packaging. Hence, taxes(2) are a cost-effective way of reducing the quantity of plastics entering the environment. There is, however, a case against the use of taxes to discourage consumption and production of a certain good. In the case of cigarettes, a recent study has suggested that a 100% tax would be needed in order to reduce adult smoking by just 5% (Callison and Kaestner, 2013), indicating that taxes are not always efficient at ensuring an outcome, as they rely on many other factors. The success of a tax specifically on plastic depends on whether the tax makes plastic more expensive than alternatives (which may be difficult given how cheap it currently is) as well as the demand-price elasticity of the product.

A similar policy would simply be to introduce a surcharge(3) on plastic goods (Nilsen, 2010). This idea comes from simple demand economics; increase the price of a good, demand will fall. Additionally, because retailers often give the money to charity, the higher price of the product will not incentivise higher supply, because the retailers are not using the bags to seek profit-maximisation, as neo-classical economics would assume. The model of the supply-curve would no longer function, rather we would just see a horizontal supply curve. Five years after China’s introduction of a surcharge on ultra-thin plastic bags in 2005, it was found that there had already been a reduction of plastic bags used by 67,000,000,000. It is too early to judge the long-term impact of the policy. There is a chance that, in time, the extra cost will be absorbed by consumers, impacting the sustainability of the policy.

Ideas from behavioural economics may solve the problem, specifically that people are averse to losses(4) (Kahneman and Tversky, 1979). Introducing a loss to people who do not recycle, could dramatically increase recycling. If recycling units were put in building entrances around major cities, and in stores, which give a small percentage of the original price of the product back to the consumer if they put their old plastic bottles in the unit, we could incentivise the recycling of plastics. Introducing a private cost to those who do not recycle their plastics, creates a loss of not recycling. Importantly, the money returned must exceed the opportunity cost of collecting it. In Germany this is being used for plastic bottles where 90% are recycled, compared to 57% of plastic bottles in the UK. Through the use of the UN to implement such a strategy on a global scale could be an effective way of combatting the plastic problem.

Part II: What can we therefore conclude?

Taxes and charges on plastics can be effective, but really only in the short-run, as over time, people absorb this extra price. These leaves tradable permits and cash-back systems as two potential solutions to plastic pollution.