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Rationally Expected Externalities: The Implications for Optimal Waste Discharge and Recycling

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  • R.A. Somerville

    (Department of Economics, Trinity College Dublin)

Abstract

What if consumers' actions reveal concern for contributing to an externality, even without a pecuniary incentive? Within a two-level model, a policymaker prices disposal of waste, and a representative consumer chooses a consumption level for a dirty good and a division of the consequent waste between recycling and disposal; only disposal creates an externality. In the special case of rational expectations, each consumer accepts full responsibility for his contribution to the externality. A first-best optimum is then achieved by a form of Pigouvian pricing, assuming unconstrained income taxes/transfers. Otherwise, Pigouvian pricing is second-best, unless individuals disclaim all responsibility for the externality and utility has a separable form. The model explains why recycling may occur even with free waste-disposal.

Suggested Citation

  • R.A. Somerville, 2012. "Rationally Expected Externalities: The Implications for Optimal Waste Discharge and Recycling," Trinity Economics Papers tep0112, Trinity College Dublin, Department of Economics.
    • Handle: RePEc:tcd:tcduee:tep0112
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    File URL: http://www.tcd.ie/Economics/TEP/2012/TEP0112.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    externality; Pigouvian tax; separable utility; rational expectation; recycling;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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