Optimal environmental tax, waste disposal charge, and illegal waste disposal

Abstract

In an attempt to reduce household waste, many countries are adopting user-pays systems such as weight-based curbside collection charges. As shown in Fullerton and Kinnaman [AER, 86, 1996], however, waste disposal charges open up the possibility of illegal disposal, calling for costly monitoring of illegal disposal or other complementary policy instruments. This necessitates a comprehensive model of waste management which can simultaneously address various policy instruments directed at waste generation during production and consumption as well as waste disposal. The model studied has environmental taxes, waste collection charges, and the monitoring of illegal waste disposal as policy instruments. At the same time, the model differentiates two types of household goods for which different waste management policies have to be adopted. For the first type of household goods, the amount of waste to be disposed of (e.g., packaging and containers) is more or less independent of the household's waste reduction effort. For this type of waste, the waste collection charge higher than the private cost of illegal disposal can lead to illegal disposal without the benefit of increased waste reduction effort. This may incur further costs of monitoring illegal disposal. As the household's waste disposal decision is the most relevant issue in this case, an optimal policy requires that the waste collection charge be low enough to prevent illegal disposal and that the household be indirectly charged for waste disposal through an environmental tax. In the case of a perfectly elastic supply curve where the tax is fully shifted to the consumer price, an optimal waste collection charge is zero and the legal waste disposal should be financed entirely through the environmental tax. Therefore, a user-pays system is not optimal for this type of waste. For the second type of household goods, the household's waste reduction effort (e.g., reusing and composting) can be significant. A low waste collection charge fails to provide enough incentive for such effort. An increase in the waste collection charge, however, increases the marginal benefit of illegal disposal as well as the marginal cost of consumption. The former can be remedied through monitoring and fining illegal disposal and the latter through an environmental tax. The resulting optimal policy generally has a strictly positive waste collection charge, an environmental tax that is less than that for the first type of waste, and a positive probability of monitoring illegal disposal. Thus, a user-pays system of waste disposal is relevant. Comparative statics of optimal policy for the second type of waste highlights the interdependence of policy instruments. An increase in the waste disposal cost has to be accompanied by a simultaneous increase in the waste collection charge, the environmental tax, and the monitoring effort. An increase in the monitoring cost has to be accompanied by a higher environmental tax but a lower waste collection charge and lower monitoring effort. An increase in the fines for illegal waste disposal has to be accompanied by a lower environmental tax, a higher waste collection charge, and a lower monitoring effort. This interdependence of policy instruments has not been satisfactorily addressed in most existing studies.