Question

Lightweight single-use plastic bags (we’ll just call them “bags”) often end up blowing along roadsides, clogging up waterways and hurting wildlife.

1. Use the supply and demand model to analyze the market for bags. Are bags over- or under-consumed relative to the optimal level? Explain using your graphical model. Be careful not to decide whether bags are over- or under-consumed and then create a model that matches your priors.
2. In 2014, California implemented a statewide ban on single-use plastic bags at major retailers. Let’s suppose there was a complete ban that sets the quantity of bags to zero (that's the same as instituting a quota of zero units). Show the impact of the ban on bags on your graph. Is this an efficient policy? Use your graphical model to explain why or why not.
3. Rather than banning bags, the state of California could have imposed a tax on the consumption of bags. Use your graphical model to show the tax that would give the efficient result. Explain how this differs from a ban.

Answer 1

The above diagram depicts the case of negative externality seen in the case of plastic bags. The privately efficient quantity in the economy occurs when Marginal Benefit is equal to Marginal Private Cost in the economy and socially efficient quantity occurs at the point where Marginal Benefit is equal to Marginal Social Cost in the economy. Thus, socially efficient quantity lies below the privately efficient quantity level. Thus, it can be stated that plastic bags are over consumed relative to their optimal level.

Complete banning of plastic bags is not an optimal policy by the government because some amount of the good is efficient for the economy. Complete banning will lead to zero unit of the good and no ampount of plastic bagss will be produced in the economy.

Imposition of tax on the use of plastic bags will shift the MPC curve upwards to MPC + Tax and the socially efficient equilibrium now becomes privately efficient equilibrium because of increase in the cost. Thus, Q* represents the efficient quantity level which shows that tax gives efficient result. It is different from ban because it moves the equilibrium to socially efficient level rather than banning the plastic bags all together because banning implementation is difficult to implement but imposition of tax will reduce the consumption of plastic bags.