Question

Background:

Plastic packaging for products first became available in the 1950s, and its use has grown exponentially over the last 65 years. Over the past several years people around the world have become increasingly aware of the impact of plastic waste on the environment. Large quantities of plastic waste in waterways, discoveries of plastics ingested by sea animals and microplastics in the food web motivated many consumers to look more carefully at how their consumption contributes to plastic waste.Over the last 12 months, the major supermarket chains in New Zealand have stopped offering “single use” plastic bags for customers’ groceries. However, these plastic bags are one small form of plastic pollution. Plastic packaging exists on the bulk of consumer products. It facilitates transportation and reduces waste, by keeping the products free from damage, and, in the case of food products, reduces the risk of contamination and spoilage in the journey from manufacturer to the retailer’s shelf.

Consider the market for a food product that is wrapped in plastic packaging.

explain how the benefits and costs accruing to those directly involved in the market are reflected in the equilibrium price and quantity in the market.

Answer 1

Usually plastic bags are smaller, much lighter, more durable easily available to everywhere. It is basically used by “normal customer”, “retailer” for transportation purpose because it reduce waste while moving goods. So, because of the many advantages of plastic bag there are wide ranges of use of it in various foods. So, the benefits are reflected by the “demand curve” and the costs are reflected by the “supply curve”.

Now, apart from the private cost there many “external cost” that they produce. First of all it is “non-biodegradable”, => decomposition doesn’t takes place. Once they are used can’t be used further. It creates pollution in water in soil. Even many animal die in ponds, see and in land. So, all of these possess big external costs.

So, in the above fig “D1” be the demand curve reflect “marginal benefit” and “S1” is the supply curve reflect “marginal cost” of food. Now, because the use of plastic bags causes external cost, => the “socially marginal cost” is given by “S2”. So, the equilibrium without the “external cost” is given by “E1”, => price and the quantity demanded are “P=P1” and “q=q1” respectively. Now, if the introduce the “external cost”, => the new equilibrium is “E2”, => the price and the quantity are given by “P=P2 > P1” and “q=q2 < q1”.

So, the because of the external cost the socially optimum “P” is higher and “q” is lower.