One Level 2 essay, complete: Question 2 of the 24, with both model answers

Part (a)Explain two policies that can be used to address market failure from the consumption of single-use plastics.[10]

Introduction

Market failure occurs when the free market fails to allocate resources efficiently, so the socially optimal output is not achieved and society suffers a net welfare loss. The consumption of single-use plastics generates a negative externality. A negative externality is a cost from consumption that falls on third parties outside the transaction. The consumer weighs only his own cost and benefit, and he ignores the cost his consumption imposes on those third parties. Two policies address this failure from opposite sides. A charge on single-use plastics raises the private cost of consuming them. Public education changes consumers' tastes and preferences, so that they want fewer of them.

Key Point 1A charge on single-use plastics internalises the external cost by raising the private cost of consumption

Marginal private benefit (MPB) is the benefit that one more unit of a good gives to the consumer of it. For a single-use plastic item this benefit is the convenience it gives its user. Marginal private cost (MPC) is the cost of supplying one more unit of a good. The consumer pays this cost as the low price of the item. The costs he leaves out fall on parties outside the transaction. Discarded plastic clogs public drains and canals, so taxpayers fund the extra clearing. Nearby households and shopkeepers bear the damage when the drains block during heavy rain. Plastic that reaches the sea breaks down into microplastics which fish ingest. Fishermen lose income as catches fall. Those who eat the seafood face health risks and the medical costs that follow. Marginal external cost (MEC) is the cost from one more unit that falls on third parties rather than on the consumer. Marginal social cost (MSC) is the total cost to society of supplying that unit, so MSC = MPC + MEC. The MSC curve therefore lies above the MPC curve, as Figure 1 shows. Marginal social benefit (MSB) is the total benefit to society from that unit. Consuming a single-use plastic item gives no benefit to third parties, so MSB equals MPB. The consumer consumes at Qm, where MPB equals MPC. Society's optimum is Qs, where MSC equals MSB. The consumer ignores MEC, so Qm lies beyond Qs. Between Qs and Qm, MSC exceeds MSB. Each of these units costs society more than the benefit it delivers, and each one is nevertheless consumed. The welfare lost on them is the deadweight loss, and the market is allocatively inefficient.

A charge on each item corrects this by making the consumer pay the external cost he was ignoring. The charge shifts the MPC curve up to MPC plus tax. The quantity at which private cost meets private benefit therefore falls from Qm toward Qs. If the charge is set equal to MEC, the MPC plus tax curve rises to meet MSC. Consumption then falls to Qs, the externality is internalised and the deadweight loss is removed. Israel requires supermarkets to charge for every plastic bag. Singapore initially preferred education, but it made a minimum charge of five cents per disposable carrier bag compulsory at large supermarket operators from 2023.

Key Point 2Public education reduces consumption toward the social optimum by changing tastes and preferences

The second policy works on the demand side rather than the cost side. Public education tells consumers about the costs their consumption imposes on these third parties, so they come to value single-use plastics less than before. Tastes and preferences are a non-price determinant of demand, so a change in them shifts the whole demand curve. The demand curve shifts leftward from DD₀ to DD₁, as Figure 2 shows. Consumption falls from Qm to Q₁, which lies closer to the socially optimal Qs. Fewer units are now consumed over the range where MSC exceeds MSB, so the deadweight loss shrinks. Education changes what the consumer wants. A consumer who wants fewer plastic bags has changed his own mind about them rather than being priced out of buying them. The fall in consumption therefore lasts without the government having to keep enforcing or spending. Singapore's National Environment Agency runs campaigns under the Reduce, Reuse, Recycle message. The campaigns encourage households to carry reusable bags and to refuse disposables they do not need.

Conclusion

Under both policies consumption falls from the free-market quantity Qm toward the socially optimal Qs, but each policy works through a different determinant. A charge leaves preferences unchanged. It raises the private cost until consumers choose to buy fewer plastics. Education leaves the price unchanged. It lowers the private benefit consumers get from the plastics. Each policy narrows the difference between the private and the social calculation that caused the market to fail. Each therefore reduces the deadweight loss from the overconsumption of single-use plastics.

Part (b)Discuss the constraints and unintended consequences of such policies.[15]

Introduction

A constraint is something that limits how far a policy can reduce consumption toward the socially optimal level. An unintended consequence is an effect the government did not plan for, and it may work against the purpose the policy was adopted to serve. Both the charge and the education campaign face constraints. These are mostly problems of design and of time rather than reasons to leave the externality uncorrected. The unintended consequences matter more. A policy aimed at plastic alone can send consumers to substitutes that impose just as much cost on others. The policy then reduces plastic use while those costs continue.

Key Point 1The charge works only where consumers have a costless substitute, and it imposes costs the government did not intend

The first constraint on the charge is the price elasticity of demand for the item it is levied on. Price elasticity of demand (PED) measures how far quantity demanded responds to a change in the price of the good itself. Single-use plastics are cheap and take up a very small share of a household's spending, so a charge of a few cents is a small proportional rise in price. Where demand is price inelastic, quantity demanded falls less than proportionately. Consumption then stays well above Qs. The main determinant of PED is whether a close substitute is available to the consumer. For a carrier bag the shopper has a substitute, since he need only bring a reusable one. Demand for carrier bags is therefore price elastic, and even a small charge produces a large fall in the number of bags taken. Singapore's five-cent minimum charge at large supermarkets is levied on exactly this case, and shoppers now carry reusable bags. For plastic packaging already wrapped around a product, or for the container a takeaway meal is served in, the shopper has no substitute at the moment of purchase. Demand for these items is price inelastic, so the same charge raises the price without changing behaviour. The second constraint is that the government cannot observe the marginal external cost. The damage is spread thinly across many parties, the taxpayers who fund drain clearing, the fishermen who lose catch and the patients who fall ill years later. The government therefore cannot tell which charge would deliver Qs, and it is likely to set the charge too low. With a charge below MEC, consumption falls only to Q₁, as Figure 3 shows. Between Qs and Q₁, MSC still exceeds MSB, and the welfare lost on these units is a residual deadweight loss.

The charge also brings consequences the government did not intend. Retailers and food outlets must supply the bags and account for the charge, so their costs rise. Higher costs raise their prices and cut their profits. The charge is also regressive. The same few cents per bag take a larger share of a low-income household's weekly spending than of a high-income household's. The charge therefore falls hardest on those least able to pay, while deterring the wealthy least. Some firms may stop offering single-use plastics altogether rather than administer the charge. Withdrawal takes away a good that carries real private benefit for shoppers who depend on it, such as parents managing young children or elderly customers who cannot carry loose items. Those consumers lose more benefit than the external cost their bags imposed, so on these units the withdrawal makes society worse off.

Key Point 2Education works slowly against long-standing habit, and can send consumers to substitutes that are no better

Education is constrained by reach and by habit. A campaign reaches most easily the people who already pay attention to environmental messages. It reaches least easily the heavy users whose consumption creates most of the external cost. The demand curve therefore shifts from DD₀ to DD₁ by less than the number of people reached would imply. Habit makes this worse. Decades of reaching automatically for a disposable bag or straw are not undone by information alone, and behaviour built up by repetition changes over years rather than months. The shift in demand is therefore both small and slow. Consumption stays near Qm for a long time, and the external cost keeps accruing while it does. The government said that education rather than a charge was the right approach. It still went on to make the bag charge compulsory in 2023, which suggests education on its own was not shifting consumption far enough.

Education also changes what consumers buy instead, and the substitute may be no better. A campaign built around plastic as a material, rather than around throwaway items in general, prompts consumers to switch to paper, biodegradable and metal alternatives. Consumers assume these must be better for the environment. The cost the substitute imposes on third parties may nevertheless be just as large. Singapore's waste system shows why. Almost all waste that is not recycled is burnt at one of four waste-to-energy plants rather than buried, and only the ash goes to Semakau Landfill. Semakau is expected to be full by around 2035, so every tonne burnt brings forward the day taxpayers must fund replacement disposal capacity. A biodegradable cup or straw is burnt in exactly the same way as a plastic one. Its ability to break down in the ground therefore gives no benefit in a country that does not bury its waste, while the resources used to make it are still used up. Paper substitutes can take more water and energy to produce than the plastic they replace. The consumer believes he has dealt with the external cost when he has only moved it somewhere else. Plastic use then falls while the waste goes to the same incinerator and the same third parties bear the same costs.

Conclusion

The constraints on both policies are real, but they are questions of design and of time rather than reasons to do nothing. The charge changes behaviour least where the shopper has no substitute at the moment of purchase, and it under-delivers everywhere while it is set below MEC. That argues for extending the charge to the throwaway items the shopper can easily replace, as Singapore has done with carrier bags. Packaging should instead be tackled through measures aimed at the producers who choose it, since the shopper cannot avoid it. Reach and habit mean education works slowly. That is an argument for running education alongside a price signal rather than in place of one, and Singapore's move from education alone to a compulsory charge shows this in practice.

The unintended consequences are the more serious problem, since they can defeat the purpose of the policy altogether. A charge that drives firms to withdraw plastics altogether imposes real costs on the shoppers who depended on them. A campaign that sends consumers to biodegradable substitutes burnt in the same incinerator delivers little gain to the third parties the policy exists to protect. The government should therefore target the cost imposed on others rather than the material. A charge or campaign aimed at plastic alone sends consumers to substitutes that may impose as much cost on the same taxpayers, fishermen and patients. That substitute cost is rarely compared with the cost of the plastic it replaces. Both policies should therefore be used, and used together, but they should be aimed at throwaway items in general rather than at plastic on its own. If they are not, plastic use will keep falling while the costs the policies exist to remove continue.