27 June 2008

Paper or Plastic?

In this post, Kevin Dick comments:
Hmmm. Then I think we disagree on the role of economics in determining "waste".

First, assume that appropriate laws/regulations force the price of a bottle of water to fully internalize all costs. Second, assume that the water inside the bottle is exactly the same as what comes out of the tap (though I assure you, some tap water tastes pretty bad).

Some people may still be willing to pay the price here in Palo Alto (where the tap water tastes pretty good BTW). Maybe it really is more convenient for them. Maybe they think it raises their status in their local primate dominance hierarchy. Maybe some deep psychological need makes them feel happier when they drink from a fresh bottle.

Who are you or I to say those preferences are "wrong" if they're willing to pay the price? They are balancing the pricing signal from the market with their own utility function. IMHO, anything beyond that moves from the domain of economics to ideology.
While I agree with Kevin (I originally misinterpreted his "fully internalizes all costs" to mean "is now" price when he meant "would be" price.), and I acknowledge the problem of ideological pricing, I want to point out an important assumption: functioning markets.

Consider "buying the right to pollute" with one's fully-priced Fiji water. If the price is paid but the bottle still ends up in the Bay, does that mean that the "fully-internalized" price really is? It's my fear of such a market failure that leads me to use paper (not plastic), since the damage from a breakdown in the "plastic bag recovery market" appears higher to me.*

So -- if fully internalized means that the bottle is fully removed from the environment, we are set. This problem, btw, is the same as I pointed out with the carbon offset market. If I pay, but offsets do not occur (or would have occurred anyway), then my payment does not accomplish the advertised goal.

Bottom Line: Price is not a perfect signal (but it's often better than anything else), and it's even less-perfect in thin, new or opaque markets. "Getting prices right" involves more than paying retail.

* I am at heart a market fundamentalist, so take these caveats as a friendly suggestion to make something quite good even better. Government involvement (e.g., plastic bag fees or bans) is not automatically a good idea.

7 comments:

  1. Thanks David. I figured we probably agreed. Sorry I wasn't clear in my original comment that "fully internalized" was hypothetical.

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  2. David,

    Sorry but your post only confused me. :)

    Are you saying that a carbon tax has obviously failed if anyone continues to emit CO2? Of course not, right?

    So why would a bottle price be necessarily wrong if someone tosses it in the bay?

    By the way, in case I'm horrifying some readers, I am not saying that as long as you "pay for it," it's OK to pollute. After all, it's free to swear at your grandma; it doesn't mean you should.

    Rather I'm just trying to get David to elaborate on what he means by "internalizing externalities," because his example of throwing a bottle in the Bay doesn't make sense to me.

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  3. Bob,

    Good point. Taxes are meant to reduce behavior but not necessarily end it. I am not sure that there is an optimal level of "bottles in the bay."

    I worry about taxes that are so low that (for some people) nothing changes at all. If we consider the behavior to have a negative effect, we should want *everyone* to respond to those taxes.

    These elasticity arguments are tough. Perhaps we should just hope that aggregate behavior changes without worrying about who is responsible for it.

    The bottom line is that it's hard to agree to taxes that are "too low" if the result is continuing pollution...

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  4. OK. I realize you know this David, but I'll just say it for possible non-economist onlookers:

    Even if someone pays the market price for something--and even if it internalizes all externalities--then "bad things" might still happen. If I hate Chinese food, I won't like the fact that a Chinese restaurant opens up and puts my favorite Mexican restaurant out of business.

    But so long as the new owners didn't steal anything, or threaten the workers at the other place, or dump chemicals into the river, this is a bona fide market outcome. Resources are being used efficiently, even though my personal utility would be higher under a different outcome.

    So it's the same thing with pollution, even littering. If for some reason most people really hated looking for a garbage can, or really got a thrill from flinging bottles into the water (maybe after putting a note inside), then it is entirely possible that a Pareto efficient outcome involves lots of littering.

    Now in reality, I think this is probably not right, and that most people would prefer a clean lake to the "convenience" of being able to litter. But this is an empirical issue.

    Last thing, I think it's a bit odd to say (which you seem to be doing), "I respect market outcomes, unless everyone else is really dumb. Then I think force is OK."

    I realize I'm putting words in your mouth, but that seems to be what you are implying.

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  5. "So it's the same thing with pollution, even littering."

    no its not. a restaurant is a private good (space) that someone has to control. pollution is either a public bad (many suffer) or despoilation of the commons -- both of which have different cost profiles....

    so, no, there is not an optimal level of pollution as there is an optimal number of chinese restaurants. That's because of property rights...

    "Now in reality, I think this is probably not right,"

    you're right :)

    "I respect market outcomes, unless everyone else is really dumb. Then I think force is OK."

    no -- don't put those words in my mouth. If someone wants to kill themselves (gun to head), I don't care. If they want to shoot me at the same time, I prefer to use force to stop them....

    Let's stick with strong property rights and discuss how things get screwed up without them...

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  6. David said:

    no its not. a restaurant is a private good (space) that someone has to control. pollution is either a public bad (many suffer) or despoilation of the commons -- both of which have different cost profiles....

    I agree that there might be different ways to deal with the issue, depending on if there are well-defined property rights or not. And yes, the best thing would be to get strong property rights established in any area where major externalities are occurring.

    But you still seem to be saying that zero pollution and zero littering are "optimal." And I'm saying I don't think so, at least for pollution and maybe littering, once we define exactly what we mean.

    E.g. if I'm in a public park and I really have to add to the local water table, I am going to do that.

    Now as far as my value system or whatever you want to call it, I don't think I've done something wrong, and I wouldn't begrudge anyway else doing the same in similar dire circumstances.

    But I wouldn't do it in somebody else's back yard.

    The difference isn't simply private property; if I went camping in a privately owned forest where I had paid the owners to camp out on their land, then I also would go behind a tree to take care of my business.

    So if it's possible that doing tinkle on a tree is "optimal," then why are you saying it's categorically impossible for 84 bottles to be the optimal amount thrown into a lake?

    E.g. maybe every once in a while a bottling truck has an accident on a bridge, and 10,000 bottles get dumped into the water below. And then it's not cost effective to go get every last one, but only a bunch that the nets happen to grab in the first few passes. What's wrong with saying even privately owned lakes would have that happen now and again?

    It's fully "internalized"; the bottling company pays the owners of the lake every time it happens. But that's cheaper than the bottling companies never using bridges, etc.

    Am I saying things you disagree with? Maybe I just misunderstood what your point was the whole time?

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  7. I am NOT saying zero pollution is optimal, but if you drop 84 bottles in MY lake, you will compensate me for ALL 84...

    Those are property rights.

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