The Recycling Industry - Essay Example

The Recycling Industry Introduction The U.S. recycling industry passed a landmark in October 1995, as the Chicago Board of Trade (CBOT) launched its Recyclables Exchange. Secondary materials such as glass, polyethylene terephthalate (PET) and high density polyethylene (HDPE) plastics, and paper now have their own market on the CBOT, which for more that 150 years has been one of the world's foremost trading systems for a wide range of commodities, from pork bellies to silver. The new exchange confirms the newfound status of recycled materials as legitimate commodities. From this emerged a central U.S. marketplace for used materials, just as there is for primary commodities like wood pulp and plastic resins. In the long run, the exchange's developers hope that it will evolve into a futures market, helping smooth out the large price fluctuations that have plagued the recycling industry in recent decades (Young, 1996). Thesis Statement: The purpose of this paper is to provide an economic profile of the recycling industry. The shifts and price elasticity of supply and demand will be identified; positive and negative externalities will be determined; wage inequality will be investigated; and monetary and fiscal policies will be discussed. How the economy affects the success of the recycling industry, and the economic influences that can affect the industry in a big way will be included in the conclusion. Discussion Cities and towns in the United States of America. have been facing the dilemma of rising municipal solid waste (MSW) generation and declining capacity of aging landfills. In response, public officials have begun to implement new policies aimed at encouraging source reduction and waste diversion through increased recycling activity. Because the Resource Conservation and Recovery Act (RCRA) gives states the responsibility for nonhazardous waste management, these efforts have not been symmetric across the nation. Nonetheless, certain trends have become apparent, including the increased use of curbside services and the adoption of unit pricing schemes such as payment for recyclable waste, in order to meet local objectives (Callan & Thomas, 2006). Shifts and Price Elasticity of Supply and Demand Municipal Solid Waste (MSW) disposal and recycling demand is based on a systems approach. The parameter estimates and associated demand elasticities have a practical application for state and local public officials who are undertaking the design and implementation of MSW management programs and policies. The benefits of MSW policy reforms as well as the expected benefits of policy to various constituencies are clear (Callan & Thomas, 2006). Unit pricing or variable rate pricing due to its market orientation is now an important focus of economic research. The system of unit pricing is simple: each unit of waste disposal has an explicit price, so that the total fee paid for MSW services increases with the quantity of waste discards. "Hence, the unit price acts as a disincentive to dispose excess waste and, in theory can be adjusted to achieve state or local disposal targets" (Callan & Thomas, 2006: 221). This is supported by Ackerman (1996) who adds that once unit pricing is established, the price elasticity of waste generation may be as little as - 0.12. This means that an 8% price increase caused only 1% drop in garbage disposal. When such a pricing scheme is lacking, the municipalities normally charge a flat fee for disposal services which is unrelated to the amount of waste generated. This eventually means that the household has no economic incentive to lower generation of waste or to divert it through recycling. This problem is increased if the flat fee is collected through property taxes, thus hidden from residents. Since this flat fee approach ignores the true marginal costs of providing MSW services, it results in an inefficient solution with too many resources allocated to municipality solid waste disposal, with greater stress on landfill capacity as the outcome. In the study conducted by Callan & Thomas (2006) two observations are of crucial interest: First, the model clearly acknowledges the endogeneity of the unit price level and the provision of both disposal and recycling curbside services. This is supported by studies conducted by Hong (1999) and Kinnaman & Fullerton (2000). However, further research is needed on this since other studies have contradicted the above findings. Second, the model underlines the close link between decisions on supply and demand for recycling. The simultaneous nature of the two factors results in cross-equation error correlation, which consequently necessitates a systems approach to estimating the model. This approach, along with an intrastate data set of 351 municipalities allows the investigation into responses to public policy instruments in a well-defined experimental context, which works towards enhancing the efficiency of the system. Positive and Negative Externalities Positive Externalities: A research study conducted by Iyer & Kashyap (2007) indicated the significant value of intervention programs. Incentives as a form of positive externality are a beneficial way to motivate people to adopt a new behavior. However, information needs to be spread or extended in order to help sustain the newly learned behavior. Thus, programs for the purpose of promoting recycling might have to include incentives and information. If so, resources need to be allocated between incentives and information. The researchers believe that the optimal choice for a flexible policy would be one that is initially biased toward incentives, but gradually changes towards information campaigns in the later stages. The rate at which resources are shifted needs to be based on monitoring key outcomes, such as number of new recyclers, values, beliefs of recyclers, etc. A flexible integration of incentives and information whose relative significance reflect critical benchmarked outcomes, may be the most effective and efficient way to introduce recycling in the short run, and to sustain continued participation in the long run. Negative Externalities: The principle of non-interference is violated if a person's town located upstream from another person's town, runs a business that pollutes the river and causes sickness or compels the latter town to spend money on water purification. The theoretical solution to this problem was developed by the economist Arthur Pigou in 1920. The impact of the former town's pollution on the latter town's water supply is called an "externality" since it is a real cost of operation that is external to the business; at the same time forcing the people downstream to bear that portion of the former business' cost (Ackerman, 1996). Pigou's solution was to suggest that a tax should be levied on the effluent from the polluting business equal to the value of the damages that it causes to others. Such a tax internalizes the former externality; the downstream costs are now correctly reflected in the upstream business. The tax can be used to compensate the downstream communities and it provides an ongoing incentive for the polluters to find ways to reduce their pollution. "If externalities are internalized in this manner, the resource allocation achieved by the market is once again optimal" (Ackerman, 1996: 29). In the case of recycling, taxes and fees structured to encourage it are more efficient than regulations mandating participation or other approaches. Very little comparison has been done to compare the administrative and other burdens of new incentive schemes with the costs of other routes to recycling. Theoretically, it is advanced that because of externalities, there is currently very little waste disposal and very little recycling. As a waste management strategy, landfilling is unfairly cheap, as a source of raw materials, virgin productions receives unwarranted subsidies. Internalizing the externalities would raise the costs of these activities making the recycling of waste and the use of secondary raw materials look comparatively better. Getting the prices right would result in the right level of recycling, higher than current levels. Although considerable effort is required to correctly internalize the externalities, the effect on the level of recycling is likely to be very small. The extent to which new incentives have influenced recycling is often as a result of getting the prices wrong. This is clear in the price of garbage collection, which is the most popular market incentive for recycling. Although correctly internalizing the externalities requires considerable effort, the effect on the level of recycling is likely to be very small. As a result of getting the prices wrong, new incentives have influenced recycling (Ackerman, 1996). Wage Inequality Recycling is an economic development tool as well as a means for improving the environment. Through re-use, recycling and waste reduction, direct development opportunities are provided to communities. Discarded materials when collected with skill and care, and upgraded discarded materials are a local resource that can contribute to local revenue, creation of employment, business and local economy (Waste to Wealth, 2006). Specifically, job creation has been extensively impacted by recycling, in local and state economies. Thousands and millions of jobs are generated and sustained in the recycling industry, throughout all the states in America. In Iowa, the direct manufacturing jobs in the recycling industry supports high wages, on an average of $47,700 per job. Over 2.5% of manufacturing workers are engaged in recycling activities (Waste to Wealth, 2006). On the other hand, those who are in the recycling industry, but are doing other jobs such as collection of waste, sorting, dealing with the financial aspect of transactions, and other similar activities are not as highly paid as those employees in direct manufacturing jobs dealing in re-use of solid waste. Estimated on a scale encompassing the entire nation, recycling and remanufacturing activities employ approximately one million manufacturing jobs, and more than $100 billion in revenue. According to the United States Recycling Economic Information Study, 2000, the recycling and reuse industry supported approximately 56,000 operations that employed over one million people, produced an annual payroll of nearly $37 billion, and totalled over $236 billion in annual revenues. It was found that related industries that provided support such as accounting firms and office supply companies also benefited from the recycling industry (Waste to Wealth, 2006). Monetary and Fiscal Policies The policy instruments that can be used to restructure the economy include "fiscal policy, government regulation, eco-labelling and tradable permits" (Brown, 2002: 234). However, restructuring the tax system is the key to eliminate the harmful economic distortions. Tax policy is particularly effective because it is endemic in nature. If taxes raise the price of fossil fuels to reflect the full cost of their use, this will permeate the economy, affecting all energy related economic decisions. Today's fiscal systems are a combination of subsidies and taxes. The aim is to reframe the fiscal system so that the prices reflect the truth, protecting the economy's natural supports. Taxes designed to incorporate in their prices the environmental costs of recycling or not recycling depending on the products, enable the market to send the right signal. They discouragage such activities as coal burning, the use of throwaway beverage containers, or cyanide gold mining. Environmental taxes and subsidies can be used towards the interests of future generations in situations where traditional economics does not take the future into account. Activities such as the planting of trees, using water more efficiently, and harnessing wind energy can be encouraged. By using fiscal policy to incorporate the indirect environmental cost, it helps decision makers from political leaders and corporate planners to individual consumers to make environmentally responsible decisions. An example is: changing from the use of basic raw materials to recycled materials not only prevents environmental disruption, but also increases employment since recycling is more labor intensive (Brown, 2002). Environmental taxes communicate information, telling the consumer that it is concerned about a product which is environmentally destructive. Further, taxes on environmentally destructive activities could increase over time resulting in a substantial portion of the total taxes collected. Restructuring the tax system has the fundamental effect of directing millions of consumer decisions in an environmentally sustainable manner. Other than tax restructuring, no other set of policies can bring about the systemic changes needed quickly enough (Brown, 2002). Besides the socio-economic demand determinants, the research study by Callan & Thomas (2006) indicated critical results which directly address MSW policy. Though without statistical support, it was found that disposal decisions are negatively related to changes in the unit price level which is positively related to recycling activity. Disposal decisions in direct response to price can be distinguished from those that arise out of an indirect response to price through recycling activity. This difference focuses on the important interaction of recycling and disposal, which is similar to Hong's (1999) finding of a feedback or mutual effect between recycling and generation. This helps in making useful decisions about source reduction and illegal disposal. Usually unit pricing and curbside services are treated as exogenous variables when estimating recycling or disposal demand functions. On the other hand, Kinnaman & Fullerton (2000) indicate that these policy instruments ought to be modeled as endogenous variables, since they may vary according to the town and household characteristics. The underlying argument is that public policy should be flexible and responsive to the constituency and to local conditions in the community. Conclusion The economy affects the success of the recycling industry. An economy that is in harmony with the earth's ecosystem would contrast radically with the polluting, destructive and ultimately self destroying economy that currently prevails, using fossil fuels, automobiles, and throwaway products. Among the key economic sectors: materials, energy and food, the most profound changes are taking place in materials and energy. In the materials sector the change "will be more in the structure of the sector itself, as it shifts from the linear economic model" (Brown, 2002: 83), where materials resourced from the mine or forest to to the landfill, and then finally to the reuse or recycle system. In this close loop system which emulates nature, recycling industries will replace extraction industries. In the future, mature industrial economies with stable populations can operate largely by recycling the materials already in use. With the closed materials loop, no waste will be yielded for the landfills. Economic influences can affect the industry in a negative way. The producer determines the amount of consumption good and the product design, that is, the material content which increases the productivity of the recycling process. Producers and households act under perfect competition, whereas the recycling firm is assumed to have monopoly power on the recycling service market. In the economy, the three possible influences that can cause market failures are: environmental externality, imperfect competition and product design externality. A promising policy scheme is a relative recycling standard combined with a consumption goods tax, a material subsidy and a subsidy on recycling services (Eichner, 2005). This paper has highlighted the recycling industry, providing an economic profile. The changes and price elasticity of supply and demand have been identified, positive and negative externailities that influence the recycling industry were determined, wage inequality, and monetary and fiscal policies were discussed. How the economy affects the success of the recycling industry, and the economic influences that can affect the industry have been determined. References Ackerman, F. (1996). Why do we recycle' Market, values and public policy. Washington D.C.: Island Press. Brown, L.R. (2002). Eco-economy: building an economy for the earth. The United States of America: Orient Blackswan. Eichner, T. (2005). Imperfect competition in the recycling industry. Metroeconomica, 56(1): 1-24. Callan, S.J. & Thomas, J.M. (2006). Analyzing demand for disposal an recycling services: a systems approach. Eastern Economic Journal, 32(2): 221-240. Hong, S. (1999). The effects of unit pricing system upon household solid waste management: the Korean experience. Journal of Environmental Management, September 1999: 1-10. Iyer, E.S. & Kashyap, R.K. (2007). Consumer recycling: role of incentives, information, and social class. Journal of Consumer Behavior, 6: 32-47. Kinnaman, T.C. & Fullerton, D. (2000). Garbage and recycling with endogenous local policy. Journal of Urban Economics, November 2000: 419-442. Waste to Wealth. (2006). Recycling means business. Institute for Local Self-Reliance. Retrieved on 23rd February, 2009 from: http://www.ilsr.org/recycling/recyclingmeansbusiness.html Young, J. (1996). Used materials enter the economic mainstream. World Watch, 9(2): 6. Read More