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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
    1. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
    3. Don Fullerton & Andrew Leicester & Stephen Smith, 2008. "Environmental Taxes," NBER Working Papers 14197, National Bureau of Economic Research, Inc.
    4. Louis Kaplow & Steven Shavell, 2002. "On the Superiority of Corrective Taxes to Quantity Regulation," American Law and Economics Review, Oxford University Press, vol. 4(1), pages 1-17, January.
    5. R. A. Somerville, 2007. "Differentiable Technology, the Curvature of the Profit Function, and the Response of Supply to Own-Price Changes," The Journal of Economic Education, Taylor & Francis Journals, pages 222-228.
    6. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, November.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    externality; Pigouvian tax; separable utility; rational expectation; recycling;

    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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