Economic Analysis of Imposing a Per-bag Charge on Garbage
Part 1: Literature Review
Introduction
Increasing levels of consumption and waste production are causing social, environmental, and
economic problems with regard to solid waste management policies and practices around the world.
Methane, a potent greenhouse gas, is generated from the decomposition of organic materials in landfill
waste, and people are increasingly concerned about the negative health and aesthetic implications of
landfills. These social and environmental concerns are leading to more stringent regulations and
requirements concerning waste disposal, and it is becoming increasingly difficult to find new landfill
sites and to construct new landfill facilities (Bauer and Miranda, 1996). Landfill space is becoming
scarce (Sterner & Bartelings, 2004), and disposal options are becoming “fewer and more costly”
(Seguino et al, 1995, p. 49).
The traditional and most commonly used waste management method involves charging a fixed
monthly or annual fee for garbage collection (Seguino et al, 1995). Municipal waste collection is paid
for generally through tax revenues (Dewees, 2002). The general tax approach to waste management,
however “provides little incentive for households to reduce solid waste generation because the tax is
not visible and is instead implicit in the property tax” (Seguino et al, 1995, p. 49). This tax is not
recognized by residents to be associated with the volume of municipal waste, and residents consider
more garbage as a free good (Kinnaman and Fullerton, 2000, p. 419). The cost of an extra unit of
waste discarded is considered to be zero, but this is obviously not the case; every unit of waste has a
disposal cost, which includes the costs of “additional labour, truck space, and tipping fees at regional
landfills or incinerators” (Kinnaman and Fullerton, 2000, p. 419).
In light of these problems, recent focus has begun to shift from waste outputs to waste inputs; in
other words, rather than striving to increase landfill space, an increasingly complicated task, waste
management strategies are beginning to focus on reducing inputs, either by encouraging wastediversion through recycling and composting programs, by encouraging source reduction through the
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imposition of a user fee or “per-bag” charge on garbage, or by a combination of these policies (Seguino
et al, 1995, 49). According to Stephanie Seguino et al, the rising costs of waste disposal are driving
changes to solid waste management approaches, and there is a “growing trend to apply market-based
incentives to addressing environmental problems” (1995, p. 49). User fee policies are one potential
solution to the environmental, social, and economic problems of solid waste management. This paper
will be divided into two parts. The first will discuss the economics of user fees and their application to
municipal garbage (or solid waste) policies, outline the pros and cons of imposing a per-bag, or
volume-based charge on garbage, and identify factors that may influence the outcomes of a user fee
garbage policy. The second part will outline a detailed specification for a cost-benefit study of the
issue.
User fees in theory
User fees, which are also referred to as “variable rate pricing”, “variable collection fees”,
“variable cost pricing”, “unit pricing”, “pay-by-the-bag” or “volume-based fees” (Seguino et al, 1995,
p. 49), differ from general taxes in that they are a form of benefit taxation. With regard to benefit
taxation, the amount that residents pay for government services is more targeted than with general
taxes, and depends on the specific benefits that individuals gain from particular government
expenditures. Benefit taxation includes benefit taxes and user fees, which “constitute mandatory or
volunteer levies imposed on persons deriving particular benefits from specific categories of publiclyprovided goods and services” (Duff, 2003, p. 5). User fees differ from benefit taxes in that
beneficiaries can be identified more accurately, the amount of benefit can be measured, and
beneficiaries can be charged depending on the amount of benefit they consume (Duff, 2003).
According to David Duff, user fees are “praised by some”, but “condemned by others”. Those
that argue in favour of user fees point out that they can increase economic efficiency, improve
government accountability, and promote basic principles of fairness. With regard to economic
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efficiency, when taxes or fees are not variable, and not directly linked to the services or products
consumed, the marginal cost of additional consumption will be considered by consumers to be zero,
and an excess of demand will result. If user fees are set at the marginal social cost of the service
provided, they can thus ensure that demand equals the social cost of supply, and that “scarce resources
are allocated to their most highly-valued uses” (Duff, 2003, p. 8). With regard to accountability, user
fees link the supply of a public good or service directly to its cost. This means that consumers are
making market-like decisions with regard to the consumption of these public goods and services, and
they can communicate their preferences to government officials more quickly and clearly. Government
officials are obligated to adhere to these preferences, as they have less flexibility with regard to where
and how they allocate funds; therefore, individuals are more likely to get what they pay for. With
regard to fairness (a central objective of most government policy), user fees treat residents equally by
charging the same fee to all, and residents pay only for the services they use (Duff, 2003).
Those that oppose user fees argue that they tend to be regressive, placing a greater burden on
poorer households, and that they contradict the purpose of public provision, since people end up paying
market prices for public goods and services. Duff counters the first argument by pointing out that,
although low income households tend to spend a higher proportion of their income on consumption,
this is not necessarily true for all goods and services, including the consumption of waste management
services. In fact, according to Richard Bird and Thomas Tsiopoulos, “the income profile of the
consumers of a large range of government services suggests that upper-income households sometimes
benefit disproportionately from the consumption of free, or low-cost, public services” (Duff, 2003, p.
19). In instances such as these, user fee policies may help to achieve distributional objectives. With
regard to the second argument, Duff recognizes that public provision is necessary when goods are nonrival, non-excludible, or when goods, such as education and healthcare, should be distributed
“according to right, need, or merit, rather than willingness to pay” (p. 21). Since strong positive
externalities are associated with the public provision of some services, it may be inappropriate to
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charge user fees for those services (Dewees, 2002, p. 588); however, Duff points out that user fees are
not inappropriate for all publicly-provided goods; “many publicly-provided goods and services have
both public and private characteristics, suggesting a potential role for benefit taxes or user fees in
conjunction with general taxes” (Duff, 2003, p. 24).
User fees – possible solution to waste-management problems?
Municipal waste services are one area in which user fees have a potentially beneficial role. As
they are both rival and exclusive, it is possible to determine who benefits from municipal waste
services, and it is possible to charge those beneficiaries for individual units of consumption (Kinnaman
and Fullerton, 2000). In Canada, in recent years, there has been increasing pressure for governments to
reduce taxes and public spending. This has lead to a reduced ability of municipal agencies to fund
services. According to Donald Dewees, user fees, when applied to certain municipal services, are
economically feasible and desirable because, not only do they provide revenue to municipalities so that
they can provide services despite tax cuts and constraint of public spending, they also “help to allocate
resources to maximize the satisfaction that we receive from those resources”; they can constrain supply
when it is expensive to expand it, and they can help to solve problems when the level of service
demanded is greater than the government resources available to supply it (2002, p. 587).
User fees and Waste-Management Policy
How it works
Under the user fee waste management system, waste collection fees are charged to residents
based on the amount (measured either by volume or weight) of solid waste that they produce for
disposal in a given time period (Seguino et al, 1995, 49). Municipalities that implement user policies
typically sell to residents a “program instrument”, such as garbage bags, tickets, stickers, punch cards,
etc. that quantifies the amount of waste requiring disposal (Seguino et al, 1995). When volume-based
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fee policies are used, garbage bags or bins may be weighed, and residents billed at a later time.
According to a study by Seguino et al, the underlying concept of user fee municipal waste policies is
that price incentives tend to encourage waste reduction (1995).
Pros & Cons
According to economic theory, moving from a flat fee to a unit price for municipal waste
services can increase source reduction and waste materials diversion (Bauer and Miranda, 1996). As
municipal residents, or the consumers of municipal waste disposal services, pay directly for waste
disposal, they no longer perceive it as a free good; “unit pricing sends a more accurate pricing signal to
the household generators of solid waste” (Bauer and Miranda, 1996, p. 2). If fees are set at the
marginal social cost of waste disposal, consumers will internalize the negative social and
environmental costs, or externalities of waste disposal, and they will strive to lower their own costs by
reducing waste. They may choose products that will minimize their waste production, and this may, in
turn, send a message to producers to manufacture products that produce less waste, or that can be
disassembled and reused (Fullerton and Wu, 1998). User fee policies can help to divert waste as
consumers shift organic and recyclable materials away from landfills to other disposal methods, such as
composting and recycling. Composting reduces organic waste in landfills, which decreases the amount
of methane gas emitted. Increased recycling produces new materials for use as manufacturing inputs,
and decreases the demand for the extraction of certain raw materials (Bauer and Miranda, 1996).
Unlike general tax policies, which charge a flat monthly or annual fee for waste disposal, user fee
policies provide an opportunity to all consumers to reduce their costs by reducing their wasteproduction and consumption of waste disposal services, while at the same time adequately providing,
and effectively allocating, the municipal revenue needed to fund disposal services (Dewees, 1996).
The potential outcomes of user fee garbage policies are not all beneficial; incompliance,
logistical difficulties, and added expenses may hamper their effectiveness. A user fee garbage policy
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implemented in one municipality may encourage illegal dumping in neighboring municipalities without
user fee policies, in accessible commercial dumpsters, in alleys or along streets, and in public
containers (Bauer and Miranda, 1996). Many authors referenced in this paper conclude that littering
and illegal dumping are not significant factors in practice. Donald Dewees states that “these problems
have been controlled in most areas where user-pay has been adopted” (2002, 592). Karen Palmer and
Margaret Walls cite studies by Miranda and Bauer (1996), Podolsky (1994), and others which provide
empirical evidence that illegal dumping is not a major issue (1999).
Another potential disadvantage of user fee policies for municipal waste disposal is the logistical
difficulty posed by multi-unit housing complexes; it may be too expensive and complicated to separate
and measure each household’s individual waste, so charging individual households appropriately is
very difficult, and may lead to unfair fee allocation (Bauer and Miranda, 1996). Another logistical
difficulty is determining appropriate prices or fees for waste disposal services. User fees should reflect
the marginal social cost of waste disposal; however, this may be difficult to determine, as “these costs
are not well documented” (Dewees, 2002, 592).
With regard to cost, user fee programs may be more costly to implement than traditional waste
management policies. They may have added administration costs compared to traditional municipal
waste management services (Bauer and Miranda, 1996), including extra publicity, tag printing,
distribution, and enforcement costs (Dewees, 2002). Public education needed to promote the program
may be complex and expensive, particularly in large centres where the audience is greater, more
diverse and responds to different types of messages and languages (Bauer and Miranda, 1996).
Other factors to consider
Many variations on user fee policies exist, and the benefits and costs of user fee policies can be
influenced by a variety of factors. Outputs such as the container type, pricing system, or fee structure
implemented, the degree of privatization, and the existence of any complementary programs (such as
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curbside recycling or composting programs) can vary between user fee models, and each of these
attributes can have a significant effect on program outcomes (Bauer and Miranda, 1996). The demand
for municipal solid waste services is affected by the demographic characteristics of municipalities,
including age distribution, household income, family size, percentage of renters and multi-unit housing
complexes, population size, community awareness and education, etc. (Seguino et al, 1995). The price
of goods consumed, the market for recycled items, the weather, and the degree of urbanization in a
given municipality also play a role in the production of waste and demand for waste services, and can,
therefore, affect the outcomes of a user fee garbage policy.
Literature Review Conclusions
User fees, when applied to solid waste management, can produce environmental benefits by
decreasing the amount of waste requiring landfill disposal. They can produce economic benefits, by
increasing municipal revenues and allowing for more efficient allocation of waste management
services. Social benefits can also result, as user fee policies allow individuals the same opportunity to
reduce their own individual costs. All of the studies referenced in this paper demonstrate that, in
practice, unit pricing is effective in reducing household waste; however, some authors mention that
there is still some debate about whether unit pricing does, in fact, decrease overall amounts of garbage
production. According to Scott Bauer and Marie Lynn Miranda, “[experts] disagree about the effect of
variable collection fees on high waste disposal behaviour, as well as the seriousness of potential
negative side-effects”, and “skepticism remains regarding whether variable rates can be successful
everywhere, or if they are only suitable for certain types of communities” (1996, p. 2). In light of these
uncertainties, and the potential costs and disadvantages of user fee policies, detailed cost-benefit
analyses are needed to determine the viability of user fee waste management policies in specific
locations.
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References
Bauer, Scott & Marie Lynn Miranda. April 1996. The Urban Performance of Unit
Pricing: An Analysis of Variable Rates for Residential Garbage Collection in Urban Areas.
U.S. Environmental Protection Agency: Washington, D.C., U.S.A. 1-46.
Dewees, Donald N. 2002. Pricing Municipal Services: The Economics of User Fees.
Canadian Tax Journal. 50(2), 587-600.
Duff, David G. September 2003. Benefit Taxes and User Fees in Theory and Practice.
[Electronic Version]. University of Toronto Law Journal, 2004. 1-81.
Fullerton, Don & Wenbo Wu. 1998. Policies for Green Design. [Electronic Version]. Journal of
Environmental Economics and Management. 36, 131-148.
Heinzerling, Lisa and Frank Ackerman. 2002. Pricing the Priceless: Cost-Benefit
Analysis of Environmental Protection. Georgetown University: Washington D.C., 2001. 1-35.
Horton, Tonia. 1999. Can the Marriage of Economics and the Environment End Happily
Ever After? [Electronic Version]. Elements. 50-58.
Kinnaman, Thomas C. and Don Fullerton. 2000. Garbage and Recycling with
Endogenous Local Policy. [Electronic Version]. Journal of Urban Economics. 48, 419-442.
www.idealibrary.com
Palmer, Karen & Margaret Walls. January 1999. Extended Product Responsibility: An Economic
Assessment of Alternative Policies. [Electronic Version]. Resources for the Future. 1-14.
http://www.rff.org/documents/RFF-DP-99-12.pdf
Seguino, Stephanie, George Criner, Margarita Suarez. October 1995. Solid waste
management options for Maine: The economics of pay-by-the-bag systems. [Electronic
Version]. Maine Policy Review. 49-58.
Sterner, Thomas and Helen Bartelings. January 1999. Household Waste Management in a
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Swedish Municipality: Determinants of Waste Disposal, Recycling, and Composting.
[Electronic Version] Environmental and Resource Economics. 13(4), 473-491.
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