Monday, February 11, 2008

The Price of Garbage

My good friend Piet responded to my old post on solid waste by recounting the waste reduction scheme used in Switzerland. In a nutshell, it involves making residents pay a per-bag charge to have their garbage hauled away. The results are that people make a serious effort to reduce the amount of garbage they produce and that the costs of providing trash service are imputed to users according to how much garbage they actually produce. It is a beautiful example of how prices act as signals to influence behavior.

It's so beautiful, in fact, that I wonder why we don't take advantage of price signaling more often. Consider, for instance, all the cities that are experiencing water shortages. Typically, water is provided as a public utility with prices set by local government. If the local government can't provide enough of it, why not charge more? Ideally they would set the marginal cost of a gallon of water at whatever level that would allow them to provide adequate water infrastructure. You could mitigate the effect on the poor by subsidizing usage up to some reasonable level, but after that everybody pays the actual cost for the water they use. The net effect should be that people with large lawns or otherwise wasteful habits would either cut back, or they would fund the construction of greater capacity. Either way, the problem would be solved, and local governments would not be in the odd position of begging people not to buy the product that government itself is supplying.

Similar arguments apply to other utilities that are stretched for capacity. By having people pay for the actual costs of providing those utilities we could fund upgrades and encourage conservation all at the same time. It, too, would be a beautiful thing.

No comments: