Monday 11 March 2013
Market failures in waste prevention
Defra has today published a call for evidence for its waste prevention programme. I haven't yet read the whole document but one thing which immediately raised my hackles was spotting a section on "market failures". I personally think that policy makers are all too quick to refer to market failure when actually these either don't exist or are preferable to the far more prevalent alternative of government failure.
The first one Defra refers to is the case of "environmental externalities" - fair enough at first glance. It then says this is manifested through the full cost of waste not being paid by producers. On the contrary, businesses do pay for the waste they produce (and pay prices which are higher than the externalities would actually suggest). In the household sector this incentive is of course missing but I don't suppose for one minute Defra is proposing the politically unpalatable introduction of pay-as-you-throw.
"Split incentives" are another policy makers' favourite. The example used here is of a manufacturer designing out waste to the benefit of consumers or local authorities (presumably packaging). But the manufacturer benefits from not having to pay for avoided material inputs. The landfill tax escalator and the commodity boom of the past decade have both shown that manufacturers respond to price signals and reduce waste.
"Information failures". This is where policy makers expose their belief that they are better placed to spot bottom-line savings than actual businesses themselves. Not true in my book.
"Behavioural barriers". Here Defra seems to think that firms/individuals discount the future too heavily and so are unwilling to take longer term actions. However, individuals must take decisions under conditions of extreme uncertainty and their choice of discount rate may actually lead to far more rational choices than Defra officials could come up with.
"Financial barriers". Businesses/individuals may be credit constrained. For me, this is just the real world where financial choices have to be made between competing priorities and, to the horror of Defra officials, waste prevention may not be at the top of the list.
Overall, I think that Defra (and its various consultants) tend to underestimate the opportunity costs associated with waste prevention measures. Implementing waste prevention often has a positive financial return. But so does investment in productive business activity/output. It is not necessarily irrational for businesses to choose to invest in production rather than waste prevention, but policy makers often seem to miss this point.
Subscribe to:
Post Comments (Atom)
The aim of this section of the call for evidence is to acknowledge the existence of market failures in waste and, therefore, potential rationales for intervention; it is not to make a judgement regarding the relative prevalence of nor the appropriate policy response for these market failures. Anyone with evidence-based views on these market failures, and their relative importance, is encouraged to respond to the call for evidence.
ReplyDeleteFrom an economic point of view we will generally start from the assumption that markets do work well. However, particularly in the case of waste prevention, the discrepancy between costs and benefits of taking action on waste seems to be so large (suggesting that cost-effective opportunities do exist) that we must consider the possibility that one or more market failures exist. The intention of this call for evidence is both (1) to verify our understanding of what the costs and benefits might be and (2) to understand why the market has not brought these in line of its own accord.
Regarding environmental externalities, businesses should indeed be paying the full cost of the disposal of their waste to landfill (including the environmental externality, through the landfill tax). However, not all producers of waste face similar incentives to reduce waste. As noted, households are the main example (they pay council tax, but there is no marginal cost associated with waste generation). Other businesses in the supply chain may be in a similar position if they design products or processes in a way that produces greater waste generation elsewhere in the chain. Even packaging producers, who are covered by PRNs, do not pay for the full externality associated with the production of packaging waste.
Furthermore, although the landfill tax has been very effective at diverting waste from landfill sites, it doesn’t necessarily address the environmental externality further up the hierarchy. For example, there is no tax on waste that is recycled, however, there are clearly environmental benefits from moving waste even further up the hierarchy towards prevention that aren’t captured by waste-producers.
Clearly we agree that there is possibly a large opportunity cost associated with time/money invested in waste prevention. However, the key point is that, based on available evidence, it seems that the benefits of waste prevention are far greater than the return on other conventional business investments.
Stephen Devlin
Waste Economist, Defra
Thanks for your comment Stephen. I agree with most of it which is fairly sensible stuff.
ReplyDeleteWhere I disagree is that the 'available evidence' shows very high net benefits of waste prevention. On the contrary, my central point is that the gross (opportunity) costs in the 'evidence' I have seen tend to be massively underestimated.
I would be interested in references to any studies where this was not the case.