The Economics of Deposit-Refund Systems: The Case of Bottle Bills in the United States – By Nick Tape

We live in an age of technological progress, mass production, and sprawling communities. Though social advances have brought countless benefits, it is important to also examine their effects with a critical eye.
Two prominent negative effects of our consumer society are pollution and litter. To combat these ills, policymakers and economists have considered taxes, penalties, and voluntary recycling programs. However, as a basic economic principle informs us: “People respond to incentives.”
When people are offered a monetary incentive to recycle and reduce pollution, we must consider it more effective than a voluntary program.
This is the rationale behind “bottle bills,” or deposit-refund systems for bottles, cans, etc.
The representatives and economists for each state first determine their marginal damage curves and marginal abatement cost curves for the pollution caused by such containers. From this, policymakers and economists can find the socially optimal tax where the marginal abatement cost curve meets the marginal damage curve. This refundable, socially optimal price amount of the tax/container is found the exact same way as a Pigovian tax is (Kolstad,118).
It is correct to assume that each state will have different respective marginal abatement cost and marginal damage curve. States place different values on preventing pollution (corresponding to the MAC curve) as well as different values regarding the damage caused by the pollution (corresponding to the MD curve). With this value, states can then set an appropriate refundable tax level for containers.
“Bottle bills” – deposit-refund systems on recyclable containers – have been instituted by eleven states thus far.
These programs are enacted by a government mandate that a predetermined amount of money from each unit sale go into an account. As stated above, each state sets its own individual redeemable value for containers. Once the consumer returns the container to a recycling center, he or she is refunded from the account.
The money that is not redeemed (either from alternative forms of recycling, out of state disposal, disposal in garbage, or from polluting) is then earmarked towards similar recycling programs.
In seven states that participated in a study of the effectiveness of the bottle bills, total litter was reduced by between 30 and 47%.
From an economic standpoint, such programs make sense.
While many economists are hesitant to support government mandates and taxes that skew market-set equilibriums, in this case we are dealing with a market failure. Pollution and littering are serious negative externalities that are not corrected by market.
One must also consider the strain placed upon the environment by the production of these containers. Depletion of natural resources is another factor that must be considered, as there is a finite amount of metal, water, and oil (all used in the production of containers) on this earth. Furthermore, the extraction of valuable natural resources takes a considerable environmental toll in and of itself.
It has been made clear that without government intervention it is not in interest of the bottling companies or consumers to reuse or recycle their containers. This is not to say that certain individuals would not recycle on a small-scale basis, but we are obviously dealing with a negative externality that has not, and will not, “take care of itself.”
One benefit of bottle bills is the creation of unofficial employment for the poor, children, the idealistic, and the lumpenproletariat. With bottle deposit programs, suddenly a niche is opened up for the unemployed and the underemployed to collect containers.
Such factors absolutely must be quantified, estimated, and then examined to determine the socially optimal size of a “bottle tax.”
When the price of the deposit is determined by setting the marginal abatement cost curve equal to the marginal damage curve (and with all factors taken into consideration), the program makes complete sense from an economic standpoint.
While the environmental benefits of such programs are outstanding, they have received some contention.
Opponents of bottle bills claim that they hurt the industry and are unfair to the beverage companies, stores, and consumers. However, these costs would be reflected in the marginal abatement cost curve. If the costs of the program would be detrimental to the health of an economy, this would be reflected in the MAC curve and perhaps the graph would indicate that the program is not worth it.
It will be clear to any student of economics that such contentions are canards.
In order to evaluate the bottle deposit system as a whole, we must also examine their alternatives.
The most popular, which is currently utilized in Maryland, is curbside recycling pickup. While this provides the state with recyclable containers, citizens lack a tangible incentive to recycle.
As we have seen from recent studies, the bottle bill states successfully recovered 71.6% of recyclable containers whereas the non-deposit states only recovered 27.9% of recyclables (Bottle Bill Resource Guide).
This difference is quite significant, and it reflects the lack of an economic incentive in the most popular, curbside pickup recycling programs.
Bottle bills are most effective when they provide a greater monetary incentive. Michigan, for instance, offers a 10 cent deposit on all bottles and containers across the board. Michigan’s recovery rate of such recyclables is an astounding 97.2%.
After examining bottle bill programs, I believe that Maryland should institute such a system to reduce pollution and encourage recycling. As our situation stands now, besides their own personal consciences, people lack an incentive to recycle.
Since the free market cannot correct this for us, government intervention is necessary. In contrast to the alternatives to this program, a deposit system is ideal as it caters to the needs and demands of the state and the individual.

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