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

2. Introduction What is efficient amount of recycling?
Will the market provide this efficient amount of recycling?
How does efficient allocation over time differ for recyclables vs. non recyclables?
Will the market provide efficient amount of product durability ?

3. Efficient Allocation of Recyclable Resources
Extraction and disposal cost
1) How would efficient market allocate a recyclable depletable resource?
in earlier periods producers rely on cheap virgin ores
later, as costs of extraction rise, producers will start to use more recycled materials as inputs
as costs of disposal also rise, incentive to recycle will increase to avoid disposal (pay per bag) fees
Composition of demand effect: consumers switch to cheaper products made from recyclables away, from expensive products made from virgin materials.

4. Efficient Allocation of Recyclable Resources
Extraction and disposal cost
1) How would efficient market allocate a recyclable depletable resource?
actual markets may take time to develop reliable supplies of recyclable materials
aluminum recycled at a high rate due to uniform quality.
plastics have little tolerance for impurities and high heat destroys them, unlike metals
for some products it is more costly for the consumer to sort the product ; thus recycling plants (waste recovery plants) do the sorting. Some even make refuse derived fuel and transport it for use in making electricity.

5. Recycling: A Closer Look
Model predicts increase in recycling over time.
U.S.:1910 recycled copper = 18%; 2001 = 70%
Lead recycling:
1972 = 30%; = 77%, mainly from batteries
recycling is not cheap. Sources of scraps are concentrated in cities, while production facilities are located near sources of virgin materials (to keep virgin transport costs down)
as recycling becomes cost competitive, some manufacturers stamp parts for identification

6. Recycling and Virgin Ore Depletion
1) Recycling extends life of a virgin material.
Suppose we have 100 (=A) tons of copper and can recycle 90% (a). Then 90 tons will available in year 2, 81 tons in year 3 and so on.
total amount available (Q) = A + Aa + Aa2 +Aa3 +… = A/(1-a)
Q = (100/(1-.9)) = (100/.1) = 1,000 tons

7. Strategic Material Problem Revisited
For the 42 most critical minerals, U.S. depends on foreign sources for more 50% of 24 of them.
4 of these are most important:
1) cobalt : Zambia and Zaire
2) chromium: South Africa
3) manganese: South Africa
4) platinum : South Africa
Gov’t response:
Strategic & Critical Material Stockpiling Act 1946
revised in 1979

8. Table 9.1 Mineral Supply Disruption Scenarios (cost in millions of 1974 dollars)
Shortfall Titanium Vanadium Cobalt Columbium Cadmium 5%
15%
25%
35%
50% , , ,
85% , , , ,

9. Substitution and Vulnerability
1)For disruptions below 35% not much problem
2) Vulnerability depends on size of the shortfall
a) small shortfalls: scarcity of titanium is problem
b) 50% shortfall : cobalt is problem
c) over 80% shortfall: vanadium is problem
cobalt no longer has a tariff as of Jan. 1, 1991 which it should have for vulnerability premium

10. Waste Disposal and Pollution
1) Disposal Cost and Efficiency
recycling costs money but does provide benefits:
1) payments for recycled materials from manufacturers.
2) avoided landfill disposal costs
The Disposal Decision
Two types of scrap:
1) new scrap: stays inside factory and firms have incentive to recycle it optimally
2) old scrap (Post consumer waste): not optimally recycled

11. Consumer Waste Disposal Decision
Do consumers recycle the efficient amount?
No. Why?
They do not face the proper incentives.
Most residential garbage fees are flat monthly fees, independent of the amount of trash.
The Marginal Cost of trash disposal is ZERO!!!
Many cities have begun using pay per bag fees. Garbage has decreased/recycling has increased.

12. Fig. 8.2 Efficient Level of Recycling
$/unit
$/unit
MCR
MCs
MCp
Social
Private QP QS
Recycled 0%
100%
disposed
100% 0%

13. Pay per bag programs

14. Pay per bag programs
Make consumers face true marginal disposal cost of trash.
Cities that have used pay per bag have significantly reduced the volume of trash and have increased recycling.
Some examples:
Highbridge, New Jersey; Charlottesville, Virginia
Perkasie, Pennsylvania ; Seattle, Washington
Marietta, Georgia - Example 9.3

15. Pay per bag programs Highbridge, New Jersey
Jan 1988 replaced flat $280 annual fee with 52 stickers for $140 for each 30 gallon can and $1.25 for each additional sticker
trash disposal decreased 25%
concern about harm to poor and elderly was unfounded since rich people have more trash than poor people. The old system forced poor people to subsidize rich people’s trash disposal.
Seattle, Washington (1989) $13.75 for 1st can and $9 for each additional can.

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

17. Disposal Costs and the Scrap Market
How would the market respond to a policy forcing product users to bear the true marginal disposal cost?
Supply of recycled materials would increase. 
Total supply of (virgin + recycled) increases 
Price falls
Quantity supplied of virgin material will decrease (movement along its supply curve.)

18. Fig. 9.3 Mkt Response to Increased Disposal Costs Price
Recyclables Sr
Increase in recycling
S’r Sd
Virgin ore St P
S’t P’ D qr
qr’
qd’ qd qt
qt’
Quantity

19. Pollution Damage and the Scrap Market
How would the market respond to a policy forcing virgin material producers to bear the true marginal external cost?
Supply of virgin materials would decrease. 
Total supply of (virgin + recycled) decreases 
Price rises  Quantity supplied of recycled material will increase (movement along its supply curve.)

20. Fig. ??? Mkt Response to Increased Virgin Costs (due to externalities)
Price
Recyclables Sr
increase in ore cost
S’d Sd
Virgin ore
S’t St P’ P D qr
qr’
qd’ qd
qt’ qt
Quantity

21. Deposit-Refund Systems
An old idea is coming back in vogue.
Remember when you could turn your Coke bottle in for 5 cents?
Coke

22. Deposit-Refund Systems
Consumer pays deposit when product is bought
Returnee receives refund when returned
Gives people incentive to turn it in rather than illegally dump it or throw it in trash.
Lower enforcement costs vs. bans on dumping.
Germany & many European countries use a deposit refund system for waste oil and recycle 65% compared to U.S. rate of 15%.
Sweden uses it for old automobiles

23. Problem of Voluntary Recycling Total Supply Price
Supply of volunteers
Total Supply w/ volunteers
$3.00
reduced quantity supplied by for-profit producers
$2.50
Demand
Quantity Qv
Q’p Qp QT

24. Tax Treatment of Minerals
Virgin minerals have received favorable tax treatment for years in the U.S.
If you are interested you can see my handout on Tax Expenditures
Tax expenditure is a loss of revenue to the U.S. Treasury because some industry or group gets a favorable tax break given to them by Congress
Minerals received $465 million in tax breaks in 1991, and $3.7 billion in 1979 (1991$)
These subsidies give virgin materials advantages that recycling does not get.

25. Product Durability Three types of product obsolescence
1) Functional obsolescence-not a problem
2) Fashion obsolescence-advertisers create and manipulate our demands
3) Durability obsolescence
a) Hausman’s study indicated that low income households purchased less durability and less energy efficiency than is dictated by dynamic efficiency criterion

26. 3) Durability obsolescence
b) Why do low income persons buy low durability?
1) Possibly not informed
2) Higher interest rates for low income persons
c) Can firms make consumers buy products that must be replaced often? No. Not if competition is strong.
example: Car imports into U.S. rose from 14.8% in 1976 to 29.2% in 1988 and cars are safer & last longer(6.2 yrs in 1976 vs 7.6 years in 1988)