Ch. 9 Recyclable Resources: Minerals, Paper, Glass, Etc.
Introduction n What is efficient amount of recycling? n Will the market provide this efficient amount of recycling? n How does efficient allocation over time differ for recyclables vs. non recyclables? n Will the market provide efficient amount of product durability ?
Efficient Allocation of Recyclable Resources n Extraction and disposal cost –1) How would efficient market allocate a recyclable depletable resource? »in earlier periods producers rely on cheap virgin ores »later, as costs of extraction rise, producers will start to use more recycled materials as inputs »as costs of disposal also rise, incentive to recycle will increase to avoid disposal (pay per bag) fees »Composition of demand effect: consumers switch to cheaper products made from recyclables away, from expensive products made from virgin materials.
Efficient Allocation of Recyclable Resources n Extraction and disposal cost –1) How would efficient market allocate a recyclable depletable resource? »actual markets may take time to develop reliable supplies of recyclable materials »aluminum recycled at a high rate due to uniform quality. »plastics have little tolerance for impurities and high heat destroys them, unlike metals »for some products it is more costly for the consumer to sort the product ; thus recycling plants (waste recovery plants) do the sorting. Some even make refuse derived fuel and transport it for use in making electricity.
Recycling: A Closer Look n Model predicts increase in recycling over time. n U.S.:1910 recycled copper = 18%; 2001 = 70% n Lead recycling: –1972 = 30%; 2002 = 77%, mainly from batteries n recycling is not cheap. Sources of scraps are concentrated in cities, while production facilities are located near sources of virgin materials (to keep virgin transport costs down) n as recycling becomes cost competitive, some manufacturers stamp parts for identification
Recycling and Virgin Ore Depletion n 1) Recycling extends life of a virgin material. n Suppose we have 100 (=A) tons of copper and can recycle 90% (a). Then 90 tons will available in year 2, 81 tons in year 3 and so on. n total amount available (Q) = A + Aa + Aa 2 +Aa 3 +… = A/(1-a) n Q = (100/(1-.9)) = (100/.1) = 1,000 tons
Strategic Material Problem Revisited n For the 42 most critical minerals, U.S. depends on foreign sources for more 50% of 24 of them. n 4 of these are most important: –1) cobalt : Zambia and Zaire –2) chromium: South Africa –3) manganese: South Africa –4) platinum : South Africa – Gov’t response: –Strategic & Critical Material Stockpiling Act 1946 –revised in 1979
Substitution and Vulnerability n 1)For disruptions below 35% not much problem n 2) Vulnerability depends on size of the shortfall –a) small shortfalls: scarcity of titanium is problem –b) 50% shortfall : cobalt is problem –c) over 80% shortfall: vanadium is problem n cobalt no longer has a tariff as of Jan. 1, 1991 which it should have for vulnerability premium
Waste Disposal and Pollution n 1) Disposal Cost and Efficiency –recycling costs money but does provide benefits: »1) payments for recycled materials from manufacturers. »2) avoided landfill disposal costs n The Disposal Decision –Two types of scrap: –1) new scrap: stays inside factory and firms have incentive to recycle it optimally –2) old scrap (Post consumer waste): not optimally recycled
Consumer Waste Disposal Decision n Do consumers recycle the efficient amount? n No. Why? n They do not face the proper incentives. n Most residential garbage fees are flat monthly fees, independent of the amount of trash. n The Marginal Cost of trash disposal is ZERO!!! n Many cities have begun using pay per bag fees. Garbage has decreased/recycling has increased.
Recycled disposed 0% 100% 0% $/unit Fig. 8.2 Efficient Level of Recycling MC p MC s MC R QPQP QSQS Private Social
Pay per bag programs
n Make consumers face true marginal disposal cost of trash. n Cities that have used pay per bag have significantly reduced the volume of trash and have increased recycling. n Some examples: –Highbridge, New Jersey;Charlottesville, Virginia –Perkasie, Pennsylvania ;Seattle, Washington –Marietta, Georgia - Example 9.3
Pay per bag programs n Highbridge, New Jersey –Jan 1988 replaced flat $280 annual fee with 52 stickers for $140 for each 30 gallon can and $1.25 for each additional sticker –trash disposal decreased 25% –concern about harm to poor and elderly was unfounded since rich people have more trash than poor people. The old system forced poor people to subsidize rich people’s trash disposal. n Seattle, Washington (1989) $13.75 for 1st can and $9 for each additional can.
Pay per bag programs n Marietta, Georgia –1994 replaced flat $15 monthly fee with $7.50 plus; –One half of residents paid $3 to $4 per can –Other half of residents paid $0.75 per bag. –trash disposal decreased for both plans –But which reduced trash more? –Pay per can program = 20% reduction –Pay per bag = 51% reduction –City’s net benefit = $586 per day for bag program –City’s net benefit = $234 per day for can program
Disposal Costs and the Scrap Market n How would the market respond to a policy forcing product users to bear the true marginal disposal cost? n Supply of recycled materials would increase. Total supply of (virgin + recycled) increases Total supply of (virgin + recycled) increases n Price falls n Quantity supplied of virgin material will decrease (movement along its supply curve.)
Fig. 9.3 Mkt Response to Increased Disposal Costs Price Quantity D SrSr Recyclables SdSd Virgin ore StSt qtqt P qrqr qdqd Increase in recycling S’ r S’ t qt’qt’ P’ qr’qr’qd’qd’
Pollution Damage and the Scrap Market n How would the market respond to a policy forcing virgin material producers to bear the true marginal external cost? n Supply of virgin materials would decrease. n Total supply of (virgin + recycled) decreases n Price rises Quantity supplied of recycled material will increase (movement along its supply curve.)
Fig. ??? Mkt Response to Increased Virgin Costs (due to externalities) Price Quantity D SrSr Recyclables SdSd Virgin ore StSt qtqt P qrqr qdqd increase in ore cost S’ d S’ t qt’qt’ P’ qr’qr’qd’qd’
Deposit-Refund Systems n An old idea is coming back in vogue. n Remember when you could turn your Coke bottle in for 5 cents? Coke
Deposit-Refund Systems n Consumer pays deposit when product is bought n Returnee receives refund when returned n Gives people incentive to turn it in rather than illegally dump it or throw it in trash. n Lower enforcement costs vs. bans on dumping. n Germany & many European countries use a deposit refund system for waste oil and recycle 65% compared to U.S. rate of 15%. n Sweden uses it for old automobiles
Demand Quantity Price $3.00 $2.50 Total Supply Total Supply w/ volunteers Supply of volunteers QvQv Q’ p QpQp QTQT Problem of Voluntary Recycling reduced quantity supplied by for- profit producers
Tax Treatment of Minerals n Virgin minerals have received favorable tax treatment for years in the U.S. n If you are interested you can see my handout on Tax Expenditures n Tax expenditure is a loss of revenue to the U.S. Treasury because some industry or group gets a favorable tax break given to them by Congress n Minerals received $465 million in tax breaks in 1991, and $3.7 billion in 1979 (1991$) n These subsidies give virgin materials advantages that recycling does not get.
Product Durability n Three types of product obsolescence n 1) Functional obsolescence-not a problem n 2) Fashion obsolescence-advertisers create and manipulate our demands n 3) Durability obsolescence –a) Hausman’s study indicated that low income households purchased less durability and less energy efficiency than is dictated by dynamic efficiency criterion
3) Durability obsolescence 3) Durability obsolescence n b) Why do low income persons buy low durability? –1) Possibly not informed –2) Higher interest rates for low income persons n c) Can firms make consumers buy products that must be replaced often? No. Not if competition is strong. n example: Car imports into U.S. rose from 14.8% in 1976 to 29.2% in 1988 and cars are safer & last longer(6.2 yrs in 1976 vs 7.6 years in 1988)