Question

At one time in the past land was plentiful in the United States. Garbage disposal meant hauling trash to the landfill and covering it. Consumers paid someone for this task, and for the most part that was the end of the story. As land has become scarcer and the amount of hazardous waste has increased, differing views on garbage have transpired. Since most products come with packaging and most will be thrown away eventually, it has been proposed that a disposal charge be placed on products at the point of production instead of the point of disposal. Please analyze this proposal from an economic point of view. Include externalities in your discussion.

Answer 1

When negative externality exits the prices of goods and services don't reflect the marginal social cost (MSC), therefore one has to take the marginal external cost (MEC) into consideration. The MEC is the cost to the 3rd party resulting from the production of a unit of a good. For example, the amount of hazardous waste is increasing day by day and most of it is predominantly packaging materials that affect the health and sustainability of the surroundings and this effect is not taking into consideration by the producers. Hence it is important to charge a tax or fee for instance here disposal charge which is equal to the MEC at the point of production. This charge would increase the cost of production hence decrease the output level and also will induce the firms to look for alternate methods of disposal of sustainable packaging which will induce a positive impact. For instance in India, Amazon and Flipkart are slowly shifting their packaging from plastic to cardboard. Online delivery service Big basket delivers in cardboard boxes and has services of taking the packaging material back so as to reuse it.

Economically

MSC=MPC+MEC=MPB

MSB=MPB