Single-use plastic bags

Single-use plastic bags

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Economics Tuition Discussion Topic: Explain why plastic carriers are a source of market failure.

  • Plastic carriers are typically non-biodegradable. The usage of plastic carriers is considered an activity that generates negative externalities, especially when carriers are used only once. Negative externalities arising from an economic activity are the incidental costs to third parties that are not taken into account by those who undertake the activity.
  • In deciding whether to accept and use an additional plastic carrier, such as for the purpose of containing goods he purchased, an individual will only take into account his private marginal cost and private marginal benefit. His private benefits include the convenience derived from the use of a light-weight carrier which is also water-proof. His private costs include the effort taken to dispose of the carrier after use.
  • Typically, many shoppers do not incur extra cost for the use of plastic carriers as many shops do not explicitly charge for carriers.
  • However, this individual does not consider the negative externalities that would be generated by the use of plastic carriers – the mess in generated in public areas due to irresponsible disposal of such carriers that other citizens have to endure; toxins entering the atmosphere when the plastic carriers are incinerated which may be inhaled by citizens. These are not taken into consideration by the individual using the carriers.


Explain over-allocation of resources in the case of excessive usage of plastic carriers

  • Based on the price mechanism, the market equilibrium level of plastic carrier usage is where private marginal cost (PMC) equates to the private marginal benefit (PMB). Individuals who use the carriers do not take into account the negative externalities arising from their usage.
  • Due to the presence of negative externalities as explained above, the social marginal cost (SMC) is greater than PMC at the market equilibrium level of plastic carrier usage. As such, at the market equilibrium, society values the usage of a carrier less than what it would cost to society. The socially efficient level of plastic carrier usage is where social marginal benefit equates to SMC i.e. the external costs are taken into account. The price mechanism thus over-allocates resources to the usage plastic carriers i.e. there is over-usage of plastic carriers whereby the market equilibrium level of plastic carrier usage exceed the socially efficient level.
  • This over-usage of plastic carriers leads to problems with waste management and contamination of the atmosphere, resulting in a loss of welfare to society, otherwise known as deadweight loss.
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