n9734007

CORRECTING
EXTERNALITIES IN
CONSUMPTION

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Introduction
This research essay aims to provide an insight and overview of the economic effects of a plastic bag tax. It is important that this issue is addressed because if it is left unaddressed, the consequences could be dire. The essay will discuss the impact that plastic bags are having on society and why the over consumption of such needs to be corrected. Furthermore, it will explain the economic models that are relevant to the issue along with analysing real world examples of similar policies; discussing the limitations and restrictions associated with such models. Setting the Context
Australia’s consumption of plastic grocery bags was estimated to be approximately seven billion per year in 2002 (National Plastic Shopping Bags Working Group, 2002), so we can assume it is in excess of this figure currently. This consumption results in negative externalities, not only impacting the environment, but also reducing the efficiency of other sectors of the economy. As these plastic bags are composed of many non-renewable resources such as crude oil, coal and gases, there is an opportunity cost associated with not recycling them. The fuel consumed by driving a car one kilometre is equivalent to the petroleum content of 8.7 bags (Environment
Australia, 2002). As these bags are used once, and disregarded, that means that Australia is wasting enough potential fuel to power a car for over 800 million kilometres annually.
Moreover, thousands of marine mammals and birds die annually around the globe due to plastic litter. When these animals die, the untouched plastic litter re-enters waterways until it is ingested by another animal. This lethal cycle is just one example of the many negative externalities impacting the environment as a result of the over-consumption of bags.
Clean up Australia day states that “There are 2 major reasons that plastic bags are particularly problematic in the litter stream”. ("Plastic Bag Facts", 2016)
1.
They last from
20
1000 years 2. They escape and float easily in air and water, travelling long distances
Unless something is done to combat these side effects, marine animals will continue to die, all the while wasting resources and polluting landscapes.

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Description of Relevant Economic Model
In order to reduce the consumption of plastic bags to an efficient level, economic theories and models can be leveraged. When there is a negative externality, a tax can bring about the efficient level of output/consumption. This can be modelled in the graph shown below.

Price of

Negative externality=amount of tax

S2

plastic bags

D1=Private benefit mEf pEFFICIENT

S1

pMARKET

mEq

d1

d2

Figure 1

QEFFECIENT

QMARKET

S1=Private cost before tax
S2=Social + Private cost after tax

Deadweight loss

0

D2=Social benefit

MEq=Market equilibrium without tax MEf=Efficient equilibrium /Market equilibrium post tax

Quantity of plastic bags

The underpinning theory that allows for this to happen is the law of supply and demand; as the price of a good rises, the quantity supplied is reduced.
If a good or service does not have any substitutes/ is addictive, then they are considered to be inelastic and consumption of such items is not responsive to changes in price. On the contrary, items like plastic bags that have alternatives i.e. jute bags, paper bags etc. are elastic and the consumption of them can be influenced via the addition of a tax.
As shown in figure 1, when the tax is applied, the price of the bags moves to “P efficient”, which
In turn causes the quantity consumed to decrease concurrently to “Q efficient. The consumption equilibrium before the tax ( MEq) is shown to be located on the S1 curve; representing the private cost that a customer would pay prior to the tax i.e. the few cents applied across all products. The S2 curve represents the social cost; that is the cost of the externality on everyone else and the environment. The tax ultimately shifts the private cost to be equal to the externality, meaning that consumers will be paying entirely for the impact of the negative externality they are having on the environment and hopefully seek to find other alternatives that have a lower social cost.

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Critical Analysis of Key Arguments
The issues associated with the over consumption of plastic bags extend beyond Australia.
There have been many attempts by other countries to combat bag consumption using economic incentives. Numerous reports reflect the impact and effectiveness of these methods.
The successfulness of the suggested plastic bag tax can be predicted by referring to these.
While the plastic bag tax will be effective in reducing the consumption of bags, it is still subject to constraints and limitations. Ireland was one of the first countries to impose a levy on the plastic bags in 2002. When the levy was first implemented, consumption was greatly reduced by an estimated 94% (Convery, McDonnell, & Ferreira, 2007). However in the following years,
Ireland has seen erosion in the public’s cooperation with the levy, with the consumption of bags having increased by 43% since the introduction of the levy (Ayalon, Goldrath, Rosenthal, &
Grossman, 2009).
Although the initial implementation of the levy saw efficient results, it is unlikely to be successful in the long due to public cooperation. In addition to this, levying plastic bags means that consumers with a higher income will be less affected. This negative utility is one reason that a tax may not be the sole solution to the problem.
In addition to this, bypass mechanisms such as: the “unofficial sale of plastic bags outside supermarkets at a price lower than the tax; sale of packaged plastic bags in the supermarkets, before the checkout counter; shifting use towards non-taxed bags etc.” as quoted by (Ayalon,
Goldrath, Rosenthal, & Grossman, 2009 (p.2030))
Other policies could also be used to correct the over consumption of plastic bags. For instance, a complete ban could be imposed on the purchase of bags by the government. The banning of plastic bags has also been implemented in other countries such as Rwanda. The initiative to ban polythene bags from Rwanda is a law that was promulgated in 2008 (Froidbise, 2015). The ban makes it illegal to manufacture, import use or sell bags in Rwanda. The strengths of this policy are that plastic bag consumption will be reduced by 100%. Furthermore, the long term effectiveness will be greater than that of the tax.
However once again, there are limitations and issues with this model. When bans are imposed, there are often subsequent black markets; obviously reducing the efficiency of the policy.

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Conclusion
To conclude, introducing a ‘plastic bag tax’ will reduce the consumption of plastic bugs, subsequently reducing the negative impact associated with them. By reducing the market equilibrium to an efficient level, the private benefit of consuming plastic bags is nullified.
These conclusions are justified through the analysis of both economic models and real-world evidence. By following in the footsteps of countries like Ireland, Australia will be one step closer to being litter-free, all while boosting the economic efficiently of the country.

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