Unit pricing of household garbage

Local governments in many countries have traditionally provided household waste collection services at a fixed rate independent of the quantity of waste each household produces. An alternative approach is becoming popular in which households are charged per unit of waste they produce based on weight, volume, collection frequency or a combination of these. Unit pricing (also variously referred to as differential, variable, bag-and-tag or pay-as-you-throw pricing) has been found to encourage diversion to recycling and sometimes to reduce overall waste quantities.

Unit pricing is widely discussed in the economics literature. Economists tend to see traditional flat rate waste services as equivalent to free disposal, which provides no incentive for waste reduction or diversion to recycling and so results in inefficiently high waste quantities. To correct this, prices need to be set at the economically efficient marginal social cost, including environmental costs.

Valuation of environmental impacts is needed as part of this approach. Diversion to recycling and reduced waste, to these economists, are expressions of improved welfare rather than worthy goals in themselves.

Studies that attempt to assess the welfare implications of unit pricing usually find a positive effect; however, much of the guidance on unit pricing is aimed at reducing garbage rather than economic efficiency and it is clearly possible that unit prices may be set too high to produce an economically efficient outcome. It is also possible that the marginal social cost of collection may be too low to inspire significant change in householder behaviours, in which case the administratively simpler method of flat rate pricing might be economically optimal.

These two different ways of thinking about unit pricing – as a means of improving welfare on the one hand or implementing an exogenously derived policy goal on the other – are quite different.

This discussion examines unit pricing from both perspectives through a case study on unit pricing of garbage in Melbourne. It assesses the effects of unit pricing at the actual price rates set and uses the measured relationships to predict the effects if prices were set at the estimated marginal social cost.

The effect of unit pricing on waste quantities

Analysis on the data collected from Melbourne municipalities between 2001 and 2006 suggests that although changes in unit price incentive levels reduce quantities of garbage, there was no clear evidence about whether this would be due to absolute reduction or diversion to recycling or composting. The research suggests that 11% of the variability was attributable to changes in the unit pricing incentive, which leaves 89% attributable to other factors.

An obvious contributor to the non-unit pricing variability in waste quantities is municipality-led changes to bin configurations. During the review period, four municipalities substantially reduced the capacity of their standard garbage bin, from 240 L to 140 or 120 L. In addition, 22 adopted comingled recycling (paper, metals, glass and plastic in a single bin), generally with an overall increase in capacity.

Reducing the garbage bin size was associated with an average of 7% less garbage over the data period. Some of this was apparently diverted to recycling (+12%), but lower overall quantities were apparent of garbage plus recyclables (-5%) and garbage plus recyclables plus organics (-3%). Changing the recycling system was associated with an average annual increase in recyclables yield of around 6%.

When the variability due to municipality-led bin changes is eliminated, 49% of the variability in garbage quantities, 27% of recyclables variability and 38% of garbage plus recyclables variability can be accounted for. Across all waste types, we can be much more certain about the impact of municipality-led garbage bin changes than that of changes in unit pricing incentives.

The effect of unit pricing at marginal rates

Analysis suggests that the effect of introducing a unit price at the marginal rate during the data period would have been a reduction in the quantity of garbage averaging between 0.3% and 0.7% per year. This is between 4% and 10% of the effect of municipality-led reductions in garbage bin size.

In summary

The link between marginal pricing and waste reduction in Melbourne is very weak. The lacklustre response to the price signal probably reflects a shortage of straightforward options for reducing waste and the relatively low cost of disposal. Given the low elasticity and higher administration costs of unit pricing, it is suggested that flat rates for garbage disposal may be economically efficient in Melbourne. Alternatively, larger or smaller bins could be issued for a one-off payment rather than a different annual fee.

Some municipalities charged price differentials considerably higher than the marginal rates estimated in this study. Usually this was associated with an overt intention to reduce waste rather than to achieve economic efficiency. Unit pricing does offer potential in these instances. Analysis suggests that introducing an annual unit charge of $2 per litre of capacity during the data period could have reduced waste by over 5%. A big distinction is apparent, then, between unit pricing as a means of optimising waste management in accordance with orthodox economic theory, and as a means of achieving exogenous waste management objectives.

Furthermore, the research suggests that this $2 charge would be economically justified only if the external costs of waste disposal were around $500 per tonne. This is more than double the highest estimate identified in a substantial review of the Australian and international literature, both formal and informal. In other words, it is unrealistically high.

Weight-based unit pricing has been found to produce stronger household responses than volume. However, the technology for rapid and accurate weighing is not yet commercially viable in Melbourne. Moreover, these systems pose some particular problems. One waste manager pointed out that any “little old lady” who denied that she put out the invoiced weight of material would place the municipality “in an impossible situation”. Weight may also be less closely matched with marginal cost than volume, given that truck and landfill capacities are constrained by volume.

Payment by collection frequency may provide more promise than weight-based measures. The technology is simpler and foregone pick-ups could save substantially on run-time. For public health reasons, this is unlikely to be acceptable unless and until organics are removed from garbage streams for separate processing.

The effects of unit pricing on waste quantities in this analysis were dwarfed by those of municipality-led changes to bin arrangements. The results indicated that moving from a 240 L to a smaller garbage bin caused diversion to recycling and an overall reduction in waste, while the shift to comingled recycling also increased materials recovery. It is, of course, unsurprising that forcing people to reduce the size of their garbage bin has a greater effect on waste quantities than merely encouraging them to do so. But what are the downsides to this authoritarian approach? Discussions with local government representatives identified none. No municipality reported substantial or ongoing problems with increased complaints, dumping or rejections due to compaction. Government data shows no major increases in recyclables contamination rates at these municipalities. This took some management effort — all respondents said that a significant community information campaign was needed before the change and, in responding to queries, after it. Also, all provided more garbage bin capacity on request to households that needed it. As a result, residents generally accepted and complied with the changes. Measured levels of satisfaction with domestic waste management in Melbourne increased slightly during the five-year review period, even though three-quarters of its residents were obliged to deal with municipality-initiated changes to their bin arrangements.

Enforced bin changes are not necessarily a perfect substitute for unit pricing. In this study, the reductions in standard garbage bin were all from 240 L to no less than 120 L, which has become the most common garbage bin size in Melbourne. The analysis casts no light on whether a municipality-led reduction beyond 120 L would be accepted by householders or would further reduce garbage. Given variation between households, unit pricing should become progressively more suited to encouraging reductions as these become harder to achieve. On the other hand, in three Melbourne municipalities the most common garbage bin size is 80 L, and only one of these operates a unit pricing system. None of the three reported any major problems in establishing their systems, and their average garbage per capita in 2004/05 was 17% below the average. This suggests scope for further obligatory changes at other Melbourne local governments, particularly if recycling of additional materials becomes viable.

Conclusion

Volume-based marginal pricing of household garbage in Melbourne does not generate a meaningful response. Marginal financial costs are low because the main components of management costs are much more influenced by the number of serviced properties than the quantity of waste collected. In addition, householders are not behaving as most economic models assume they do — they are reducing garbage for non-economic reasons and accepting authoritarian constraints on their garbage capacity. Unit pricing of garbage can be useful for encouraging recycling and (perhaps) waste reduction in Melbourne, but only if economic principles are set aside and pricing is overtly used as a means of achieving these ends. Presumably, these findings would be at least partially applicable to cities with similar characteristics and bin-based waste systems.