October 2015 will see England introduce a charge of 5p for plastic bags.
Early evidence from Scotland suggests that a tax on plastic bags can lead to a significant fall in demand. Supermarkets in Scotland reported an 80% fall in use of plastic bags a month after the charge was introduced. (Times). A study in Wales suggested a 70% fall. (Guardian)
However, later studies showed that when the public got used to the tax, demand started to increase again. (e.g. growth in Wales use)
There seems to be widespread public support for a tax which aims to cut down on waste. With nearly 66% of respondents supporting the introduction of a 5p charge.
The economics behind plastic bags
If goods are free, people will consume to the point where the marginal benefit is zero. We will take plastic bags, even if the benefit is very minimal.
But, there are private costs involved in the manufacturer of plastic bags. If the price is free, there will be overconsumption. We will have an allocatively inefficient allocation of resources.
- With a price of £0.00 – consumption of plastic bags is 10 million.
- With an increase in price to £0.05 – consumption of plastic bags falls to 4 million.
- Allocative efficiency occurs when the price equals the marginal cost of consumption. But, this does not occur when price is zero.
- When price was £0.00 and consumption 10 million, there was significant deadweight welfare loss, the MC of producing extra plastic bags is greater than the marginal utility consumers gain from having extra plastic bags.
- When plastic bags are free, we will always take as many as we need, and we tend not to bother recycling bags. It is easiest just to throw away, and pick up new ones next time.
- Charging 5p, has made consumers pay the full marginal cost. This point is allocatively efficient because now the price = marginal cost
Externalities of plastic bags
In addition to the private cost of producing plastic bags, there are also significant external costs in using plastic bags – environmental costs, litter, damage to wildlife, use of plastic / oil in the production of bags. Therefore, the social marginal cost of plastic bags is greater than the private marginal cost. Supermarkets may be able to purchase plastic bags for an average of 0.5p. Therefore, it is not worth them charging. However, if you include all the external costs of plastic bags, the social cost is much greater.
If a good has a negative externality of consumption, the social benefit is less than the private benefit. In a free market, consumption will be at Q1, but this leads to over-consumption of the good.
The plastic bag tax can be seen as a way to internalise the externality. Consumers are now paying the full social cost of consuming plastic bags.
Opportunity cost of free plastic bags.
Another economic viewpoint is to consider the opportunity cost of free plastic bags.
- Supermarkets will pass on the costs of plastic bags in higher prices
- Society has to pay for cleaning up the litter from plastic bags.
Changing consumer behaviour
The interesting thing is how much much a 5p charge can alter consumers behaviour. If the price of persons weekly shopping increased 20p from £50.80 to £51.00 – most consumers wouldn’t notice. But, the 5p plastic bag charge is quite visible and it seems many do want to avoid paying.
Could this be a trend towards more social cost pricing?
From the perspective of an economist, there is no such thing as a free plastic bag. Charging 5p leads to greater economic efficiency to make consumers pay the full social cost. This principle could be applied in many other areas such as:
- Tax on sugary drinks (See: Fat tax)
- Electronic road pricing for congestion.
However, the trend towards greater social cost pricing may be difficult to implement.
A 5p tax is really insignificant. Consumers can feel good about reducing waste and helping the environment, yet it is not much of a sacrifice to pay 5p for a plastic bags or re-use a plastic bags.
If the government proposed drivers pay the full social cost of driving (pollution, congestion, accidents) e.t.c, you could see significant increases in the price to drive on busy roads. An extra 5p per litre on petrol is very different to a 5p tax on plastic bags.
But, the principle of realising ‘free’ goods are not necessarily free of economic costs is a positive step forward.
Targeting the tax raised
Another success of the plastic bag tax is that shops are free to use the money raised for local good causes. Consumers don’t feel like they are giving to a large government pot, where the money is lost in the £600bn a year government spending, but can help local good causes.
- Similarly, if a congestion charge was introduced, if the money was specifically earmarked for improving roads, it may make it more palatable.
- If a tax on sugary drinks was ringfenced for the NHS to spend money on treating diabetes and tooth decay, again it may make it more palatable.