Question

DAY WITHOUT PLASTIC BAGS

Provigo, Maxi and Loblaws grocery stores will offer a free reusable bag with any purchase of $ 35 or more, or a reusable container with any purchase of $ 100 or more. [...]

Several merchants reward customers who use reusable bags by giving them $ 5 per bag. Some are calling for more dissuasive measures, such as imposing a tax on each plastic bag supplied to the cash register. Others are calling for an outright ban on plastic bags.

The Quebec Liquor Corporation [decided] to completely remove its single-use bags from its network. [...]

Ireland has introduced a tax on plastic bags. [...] customers are charged a tax of 25 cents on each plastic or paper bag used.

In Denmark, the tax is imposed on the merchant who absorbs it in the price of his products.

In France, we want to ban the marketing of non-biodegradable plastic grocery bags.

                                                                                                                                                  Le Soleil, 6 juin 2008

a. Describe the external effect associated with the use of plastic bags.

b. List in the article the different measures proposed to counter this externality.

c.Using a graph, illustrate the deadweight loss generated by the use of plastic bags.

d. On the same graph, illustrate the effect of a tax on plastic bags.

e. Explain how a tax may be preferable to a ban on plastic bags.

Answer 1

Answer a :-

The above description is an example of negative production externality where the cost of pollution due to use of single use plastic bags leads to higher social cost then the private cost of using such bags .Single use plastic bags leads to tons of plastic waste every year which is unable of being disposed off properly and is dumped into the oceans creating negative effects on the marine life and deteriorating social environment . Due to this reason the marginal social cost of using plastic bags is higher than the private marginal cost of using such bags .This leads to deadweight loss of social welfare because MSC is greater than MPC because the market output Q1 is higher than the social optimum position Q 2.

Answer 2 :-

1) The most common solution to this problem is imposition of pollution tax on the polluters thereby which their marginal private cause of consuming plastic bags increases leading to higher prices and lower quantity consumption of the plastic bags.

2) Subsidizing the use of reusable bags and containers which increases their consumption automatically leads to decrease in the consumption of single use plastic bags.

3) The most severe correction method is imposing outright ban on the use of plastic bags thereby completely discouraging the consumption of plastic bags.

Answer 3 :-

In the above graph the social marginal cost curve is higher than the private marginal cost curve as the dumping of plastic bags into the oceans leads to decrease in the quality of environment thereby creating health effects to Marine animals as well as common people .The current market equilibrium is formed at point C where the private marginal cost curve intersects the marginal benefit curve. However the social marginal cost curve intersects the marginal benefit curve at point A which clearly states that the optimum social quantity of use of plastic bags is Q2 which is lower than the current market equilibrium quantity of Q1. As the SMC> PMC , thus the society faces a deadweight loss represented by the area enclosed by a triangle ABC.

Answer d :-

When a tax is imposed, it automatically increases the private marginal cost curve to the social marginal cost curve .Due to increase in the cost of using plastic bags, the private marginal cost curve becomes higher and becomes equal to social marginal cost curve thereby intersecting the marginal benefit curve at point A automatically leading to socially optimal consumption of Q2 quantity of plastic bags.

Answer e :-

Taxes are preferable than a ban because imposition of tax is much simpler and automatically increases the private marginal cost of using such bag thereby automatically adjusting the equilibrium point to a lower amount of plastic bag consumption . Im comparison to this, imposition of Ban is much harder in terms of surveillance that nobody is breaking the rules of restriction of using such bags . Inaddition to this finding an alternative to complete Ban is much harder then limiting the uses of such bags.