Ch. 9 Recyclable Resources:Ch. 9 Recyclable Resources: Minerals, Paper, Glass, Etc. Minerals, Paper, Glass, Etc.

IntroductionIntroduction What is efficient amount of recycling?What is efficient amount of recycling? Will the market provide this efficient Will the market provide this efficient

amount of recycling?amount of recycling? How does efficient allocation over time How does efficient allocation over time

differ for recyclables vs. non recyclables?differ for recyclables vs. non recyclables? Will the market provide efficient amount of Will the market provide efficient amount of

product durability ?product durability ?

Efficient Allocation of Recyclable ResourcesEfficient Allocation of Recyclable Resources Extraction and disposal costExtraction and disposal cost

– 1) How would efficient market allocate a recyclable 1) How would efficient market allocate a recyclable depletable resource?depletable resource?

» in earlier periods producers rely on cheap virgin oresin earlier periods producers rely on cheap virgin ores

» later, as costs of extraction rise, producers will start to use more later, as costs of extraction rise, producers will start to use more recycled materials as inputsrecycled materials as inputs

» as costs of disposal also rise, incentive to recycle will increase to as costs of disposal also rise, incentive to recycle will increase to avoid disposal (pay per bag) feesavoid disposal (pay per bag) fees

» Composition of demand effectComposition of demand effect:: consumers switch to cheaper consumers switch to cheaper products made from recyclables away, from expensive products products made from recyclables away, from expensive products made from virgin materials. made from virgin materials.

Efficient Allocation of Recyclable ResourcesEfficient Allocation of Recyclable Resources Extraction and disposal costExtraction and disposal cost

– 1) How would efficient market allocate a recyclable depletable 1) How would efficient market allocate a recyclable depletable resource?resource?

» actual markets may take time to develop reliable supplies of recyclable actual markets may take time to develop reliable supplies of recyclable materialsmaterials

» aluminum recycled at a high rate due to uniform quality.aluminum recycled at a high rate due to uniform quality.» plastics have little tolerance for impurities and high heat destroys plastics have little tolerance for impurities and high heat destroys

them, unlike metalsthem, unlike metals» for some products it is more costly for the consumer to sort the product for some products it is more costly for the consumer to sort the product

; thus recycling plants (waste recovery plants) do the sorting. Some ; thus recycling plants (waste recovery plants) do the sorting. Some even make refuse derived fuel and transport it for use in making even make refuse derived fuel and transport it for use in making electricity.electricity.

Recycling: A Closer LookRecycling: A Closer Look Model predicts increase in recycling over time.Model predicts increase in recycling over time. U.S.:1910 recycled copper = 18%; 2001 = 70%U.S.:1910 recycled copper = 18%; 2001 = 70% Lead recycling:Lead recycling:

– 1972 = 30%; 2002 = 77%, mainly from batteries1972 = 30%; 2002 = 77%, mainly from batteries recycling is not cheap. Sources of scraps are recycling is not cheap. Sources of scraps are

concentrated in cities, while production facilities are concentrated in cities, while production facilities are located near sources of virgin materials (to keep virgin located near sources of virgin materials (to keep virgin transport costs down)transport costs down)

as recycling becomes cost competitive, some as recycling becomes cost competitive, some manufacturers stamp parts for identificationmanufacturers stamp parts for identification

Recycling and Virgin Ore DepletionRecycling and Virgin Ore Depletion 1) Recycling extends life of a virgin material.1) Recycling extends life of a virgin material. Suppose we have 100 (=A) tons of copper and Suppose we have 100 (=A) tons of copper and

can recycle 90% (a). Then 90 tons will can recycle 90% (a). Then 90 tons will available in year 2, 81 tons in year 3 and so on. available in year 2, 81 tons in year 3 and so on.

total amount available (Q) = A + Aa + Aatotal amount available (Q) = A + Aa + Aa22 +Aa+Aa3 3 +… = A/(1-a) +… = A/(1-a)

Q = (100/(1-.9)) = (100/.1) = 1,000 tonsQ = (100/(1-.9)) = (100/.1) = 1,000 tons

Strategic Material Problem RevisitedStrategic Material Problem Revisited For the 42 most critical minerals, U.S. depends on For the 42 most critical minerals, U.S. depends on

foreign sources for more 50% of 24 of them.foreign sources for more 50% of 24 of them. 4 of these are most important:4 of these are most important:

– 1) cobalt : Zambia and Zaire1) cobalt : Zambia and Zaire– 2) chromium: South Africa2) chromium: South Africa– 3) manganese: South Africa3) manganese: South Africa– 4) platinum : South Africa4) platinum : South Africa– Gov’t response:Gov’t response:– Strategic & Critical Material Stockpiling Act 1946 Strategic & Critical Material Stockpiling Act 1946 – revised in 1979revised in 1979

Table 9.1 Mineral Supply Disruption Scenarios (cost in millions of 1974 dollars)

Shortfall Titanium Vanadium Cobalt Columbium Shortfall Titanium Vanadium Cobalt Columbium CadmiumCadmium

5% 23 19 6 6 ---5% 23 19 6 6 --- 15% 69 38 12 11 ---15% 69 38 12 11 --- 25% 140 98 30 35 ---25% 140 98 30 35 --- 35% 198 159 49 46 135% 198 159 49 46 1 50% 340 21,532 25,667 17,136 250% 340 21,532 25,667 17,136 2 85% 33,475 80,752 74,976 78,800 4 85% 33,475 80,752 74,976 78,800 4

Substitution and VulnerabilitySubstitution and Vulnerability 1)For disruptions below 35% not much problem1)For disruptions below 35% not much problem 2) Vulnerability depends on size of the shortfall2) Vulnerability depends on size of the shortfall

– a) small shortfalls: scarcity of titanium is problema) small shortfalls: scarcity of titanium is problem– b) 50% shortfall : cobalt is problemb) 50% shortfall : cobalt is problem– c) over 80% shortfall: vanadium is problemc) over 80% shortfall: vanadium is problem

cobalt no longer has a tariff as of Jan. 1, 1991 cobalt no longer has a tariff as of Jan. 1, 1991 which it should have for vulnerability premiumwhich it should have for vulnerability premium

Waste Disposal and PollutionWaste Disposal and Pollution 1) Disposal Cost and Efficiency1) Disposal Cost and Efficiency

– recycling costs money but does provide benefits:recycling costs money but does provide benefits:» 1) payments for recycled materials from manufacturers.1) payments for recycled materials from manufacturers.» 2) avoided landfill disposal costs2) avoided landfill disposal costs

The Disposal DecisionThe Disposal Decision– Two types of scrap:Two types of scrap:– 1) new scrap: stays inside factory and firms have incentive 1) new scrap: stays inside factory and firms have incentive

to recycle it optimallyto recycle it optimally– 2) old scrap (Post consumer waste): not optimally recycled2) old scrap (Post consumer waste): not optimally recycled

Consumer Waste Disposal DecisionConsumer Waste Disposal Decision Do consumers recycle the efficient amount?Do consumers recycle the efficient amount? No. Why?No. Why? They do not face the proper incentives.They do not face the proper incentives. Most residential garbage fees are flat monthly fees, Most residential garbage fees are flat monthly fees,

independent of the amount of trash.independent of the amount of trash. The Marginal Cost of trash disposal is The Marginal Cost of trash disposal is ZERO!!!ZERO!!! Many cities have begun using pay per bag fees. Many cities have begun using pay per bag fees.

Garbage has decreased/recycling has increased.Garbage has decreased/recycling has increased.

Recycled

disposed

0%

100%

100%

0%

$/unit $/unitFig. 8.2 Efficient Level of Recycling

MCp

MCs

MCR

QP QS

PrivateSocial

Pay per bag programsPay per bag programs

Pay per bag programsPay per bag programs Make consumers face true marginal disposal cost of Make consumers face true marginal disposal cost of

trash.trash. Cities that have used pay per bag have significantly Cities that have used pay per bag have significantly

reduced the volume of trash and have increased reduced the volume of trash and have increased recycling.recycling.

Some examples:Some examples:– Highbridge, New Jersey;Highbridge, New Jersey; Charlottesville, VirginiaCharlottesville, Virginia– Perkasie, Pennsylvania ;Perkasie, Pennsylvania ; Seattle, WashingtonSeattle, Washington– Marietta, Georgia - Example 9.3Marietta, Georgia - Example 9.3

Pay per bag programsPay per bag programs Highbridge, New JerseyHighbridge, New Jersey

– Jan 1988 replaced flat $280 annual fee with 52 stickers for $140 Jan 1988 replaced flat $280 annual fee with 52 stickers for $140 for each 30 gallon can and $1.25 for each additional stickerfor each 30 gallon can and $1.25 for each additional sticker

– trash disposal decreased 25%trash disposal decreased 25%– concern about harm to poor and elderly was unfounded since concern about harm to poor and elderly was unfounded since

rich people have more trash than poor people. The old system rich people have more trash than poor people. The old system forced poor people to subsidize rich people’s trash disposal.forced poor people to subsidize rich people’s trash disposal.

Seattle, Washington (1989) $13.75 for 1st can and $9 for Seattle, Washington (1989) $13.75 for 1st can and $9 for each additional can.each additional can.

Pay per bag programsPay per bag programs Marietta, GeorgiaMarietta, Georgia

– 1994 replaced flat $15 monthly fee with $7.50 plus;1994 replaced flat $15 monthly fee with $7.50 plus;– One half of residents paid $3 to $4 per canOne half of residents paid $3 to $4 per can– Other half of residents paid $0.75 per bag.Other half of residents paid $0.75 per bag.– trash disposal decreased for both planstrash disposal decreased for both plans– But which reduced trash more?But which reduced trash more?– Pay per can program = 20% reductionPay per can program = 20% reduction– Pay per bag = 51% reductionPay per bag = 51% reduction– City’s net benefit = $586 per day for bag programCity’s net benefit = $586 per day for bag program– City’s net benefit = $234 per day for can programCity’s net benefit = $234 per day for can program

Disposal Costs and the Scrap Market Disposal Costs and the Scrap Market How would the market respond to a policy forcing How would the market respond to a policy forcing

product users to bear the true marginal disposal cost? product users to bear the true marginal disposal cost? Supply of recycled materials would increase. Supply of recycled materials would increase. Total supply of (virgin + recycled) increasesTotal supply of (virgin + recycled) increases Price fallsPrice falls Quantity supplied of virgin material will decrease Quantity supplied of virgin material will decrease

(movement along its supply curve.)(movement along its supply curve.)

Fig. 9.3 Mkt Response to Increased Disposal CostsPrice

Quantity

D

SrRecyclables

SdVirgin ore

St

qt

P

qr qd

Increase in recyclingS’r

S’t

qt’

P’

qr’ qd’

Pollution Damage and the Scrap MarketPollution Damage and the Scrap Market How would the market respond to a policy How would the market respond to a policy

forcing virgin material producers to bear the forcing virgin material producers to bear the true marginal external cost? true marginal external cost?

Supply of virgin materials would decrease. Supply of virgin materials would decrease. Total supply of (virgin + recycled) decreases Total supply of (virgin + recycled) decreases Price rises Price rises Quantity supplied of recycled Quantity supplied of recycled

material will increase (movement along its material will increase (movement along its supply curve.)supply curve.)

Fig. ??? Mkt Response to Increased Virgin Costs (due to externalities)Price

Quantity

D

SrRecyclables

SdVirgin ore

St

qt

P

qr qd

increase in ore costS’d

S’t

qt’

P’

qr’ qd’

Deposit-Refund SystemsDeposit-Refund Systems An old idea is coming back in vogue.An old idea is coming back in vogue. Remember when you could turn your Coke Remember when you could turn your Coke

bottle in for 5 cents?bottle in for 5 cents?

Coke

Deposit-Refund SystemsDeposit-Refund Systems Consumer pays deposit when product is boughtConsumer pays deposit when product is bought Returnee receives refund when returnedReturnee receives refund when returned Gives people incentive to turn it in rather than illegally Gives people incentive to turn it in rather than illegally

dump it or throw it in trash.dump it or throw it in trash. Lower enforcement costs vs. bans on dumping.Lower enforcement costs vs. bans on dumping. Germany & many European countries use a deposit Germany & many European countries use a deposit

refund system for waste oil and recycle 65% compared refund system for waste oil and recycle 65% compared to U.S. rate of 15%.to U.S. rate of 15%.

Sweden uses it for old automobilesSweden uses it for old automobiles

Demand

Quantity

Price

$3.00

$2.50

Total Supply

Total Supply w/ volunteers

Supply of volunteers

Qv Q’p Qp QT

Problem of Voluntary Recycling

reduced quantity supplied by for-profit producers

Tax Treatment of MineralsTax Treatment of Minerals Virgin minerals have received favorable tax treatment for Virgin minerals have received favorable tax treatment for

years in the U.S.years in the U.S. If you are interested you can see my handout on Tax If you are interested you can see my handout on Tax

ExpendituresExpenditures Tax expenditure is a loss of revenue to the U.S. Treasury Tax expenditure is a loss of revenue to the U.S. Treasury

because some industry or group gets a favorable tax break because some industry or group gets a favorable tax break given to them by Congressgiven to them by Congress

Minerals received $465 million in tax breaks in 1991, and Minerals received $465 million in tax breaks in 1991, and $3.7 billion in 1979 (1991$) $3.7 billion in 1979 (1991$)

These subsidies give virgin materials advantages that These subsidies give virgin materials advantages that recycling does not get.recycling does not get.

Product DurabilityProduct Durability Three types of product obsolescence Three types of product obsolescence 1) Functional obsolescence-not a problem1) Functional obsolescence-not a problem 2) Fashion obsolescence-advertisers create and 2) Fashion obsolescence-advertisers create and

manipulate our demandsmanipulate our demands 3) Durability obsolescence3) Durability obsolescence

– a) Hausman’s study indicated that low income a) Hausman’s study indicated that low income households purchased less durability and less energy households purchased less durability and less energy efficiency than is dictated by dynamic efficiency efficiency than is dictated by dynamic efficiency criterioncriterion

3) Durability obsolescence3) Durability obsolescence b) Why do low income persons buy low b) Why do low income persons buy low

durability?durability?– 1) Possibly not informed1) Possibly not informed– 2) Higher interest rates for low income persons2) Higher interest rates for low income persons

c) Can firms make consumers buy products that c) Can firms make consumers buy products that must be replaced often? No. Not if competition is must be replaced often? No. Not if competition is strong.strong.

example: Car imports into U.S. rose from 14.8% example: Car imports into U.S. rose from 14.8% in 1976 to 29.2% in 1988 and cars are safer & last in 1976 to 29.2% in 1988 and cars are safer & last longer(6.2 yrs in 1976 vs 7.6 years in 1988)longer(6.2 yrs in 1976 vs 7.6 years in 1988)