Academic journal article Contemporary Economic Policy

Price and Substitution in Residential SOLID WASTE

Academic journal article Contemporary Economic Policy

Price and Substitution in Residential SOLID WASTE

Article excerpt

1. INTRODUCTION

Many municipalities desire to increase recycling and decrease garbage production. Given the well-documented advantages of instituting per-weight garbage fees over flat-rate pricing, many cities have adopted such pricing systems. Cities are now trying to balance the need for additional revenue with social welfare concerns by adjusting the relative price of garbage collection and recycling. Since these price adjustments occur without the additional effect of an adjustment to a new system, we would expect different consumer responses than those documented in studies examining the initial switch to per-unit pricing from flat-rate pricing. Thus, cities need estimates of consumer responses to price changes in existing programs.

In 2004, the City of Grand Rapids, MI (United States), increased their per-unit residential garbage disposal fee, providing an opportunity to study this type of change. We estimated the price elasticity of demand for garbage and the cross-price elasticity for recycling and found that the price change had a positive financial impact on the city. The resulting change in net social benefit suggests that the new per-unit fee is close to the social marginal cost.

Using a fixed-effects specification, the estimate of price elasticity of demand for garbage disposal is comparable to that found in the existing literature. This indicates that consumers are somewhat unresponsive to the distinction between new and preexisting regimes and lends confidence to previous estimates. However, the estimated cross-price elasticity for recycling suggests that consumers are more responsive to substituting recycling for garbage disposal than previously found. The data also show that bad (wet or cold) weather decreases garbage collected in winter months with less effect in summer months. Seasonality has been found to matter in previous literature and still matters, even in the presence of controls for weather. Adjustment time of consumers to the new price is tested and found to be several months, implying that data immediately following a price change may not be appropriate to incorporate when estimating elasticities. Finally, the shift to recycling results in significant financial benefits to the city and a small decrease in social welfare.

II. LITERATURE REVIEW

There have been many studies of per-unit pricing for garbage since it was first studied by Wertz (1976). Kinnaman and Fullerton (2000) provide a summary of these papers prior to 2000, including a table of estimates from each paper (p.133). They show a range of demand elasticity estimates from--0.076 to-0.39 for garbage. They also report estimates of the effect on recycling. Only one of the studies reported gives a cross-price elasticity and that is 0.073. However, percentage changes in recycling are reported ranging from 0% to 128%. The wide range in estimates is caused by a number of factors. First, the estimates were generated by a variety of methods. Second, some estimates are confounded by simultaneous policy or program shifts, or do not include effects of a price change (instead comparing cross-sections suffering from municipality self-selection bias). In addition, many of the influential papers in the field are reprinted in Kinnaman (2003).

Generally, there are three basic types of applied studies of user fees for garbage. One type of study gathers household-level information before and after a unit price change. Examples of this type of research include Hong et al. (1993) and Fullerton and Kinnaman (1996). This type of study primarily gathers data from and with the knowledge of households, creating potential self-selection and observational biases.

A second type of study calculates the price elasticity of garbage collection for a cross-section of municipalities using different pricing schemes. An example of this type of literature is Podolsky and Spiegel (1998). However, aggregation and the presence of non-measurable differences in a cross-sectional data set can create an endogeneity issue, as municipalities with high garbage fees likely have constituents with different attitudes toward garbage and recycling than those with low fees. …

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