The Plastic Crisis — Competitive Supply, Negative Externalities and Correction

Case

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Question 1: The Plastic Crisis

Extract 1: What you need to know about plant-based plastics

More than eighteen trillion pounds of plastic have been produced to date, and eighteen billion pounds of plastic flows into the ocean every year. It ensnares the marine animals we cherish and the fish we put on our plates, it appears in the table salt we use, and it’s even found in our own bodies. As more research on the impact of using so much plastic comes to light, consumers and manufacturers are left scrambling for an alternative to the ubiquitous material, and bioplastics have emerged as a potential alternative.

Bioplastic simply refers to plastic made from plant or other biological material instead of petroleum. It is also often called bio-based plastic. It can either be made by extracting sugar from plants like corn and sugarcane to convert into polylactic acids (PLAs), or it can be made from polyhydroxyalkanoates (PHAs) engineered from microorganisms. PLA plastic is commonly used in food packaging, while PHA is often used in medical devices like sutures and cardiovascular patches.

“The argument [for bio-based plastics] is the inherent value of reducing the carbon footprint,” says chemical engineer Ramani Narayan from Michigan State University, who researches on bioplastic.

However, using these ingredients for plastics has raised some concerns. First, the production of bioplastics requires huge investment in land, fertilisers and chemicals. Second, the use of these plants for plastics will trigger a competition between plants for food versus plants for plastics, which will likely lead to a sharp increase in food prices and a food crisis.

Adapted from National Geographic, 15 November 2018

Extract 2: The monstrous scale of plastic bag wastage in Singapore

If each person in Singapore uses 1.6 plastic bags a day, the country would guzzle enough petroleum in a year to drive 8,555 cars round the world. That is not a hypothetical situation.

It takes 37 million kg of crude oil and 12 million kg of natural gas to produce three billion plastic bags – the amount the Republic was already consuming in a year by 2011. And the 1.6 bags that comes to per person per day is twice as many as the average Malaysian uses and thrice the figure in Australia. Worldwide, a plastic bag is used, on average, for 12 minutes before being discarded. And this is damaging the environment.

“Many of them just go into the incinerators, and worse, they end up in oceans,” said Ms. Cheam.

Birds often mistake shredded plastic bags for food, filling their stomachs with toxic debris. For hungry sea turtles, it’s nearly impossible to distinguish between jellyfish and floating plastic shopping bags. Fish eat thousands of tons of plastic a year, transferring it up the food chain to bigger fish and marine mammals and eventually into human bodies.

Adapted from ChannelNewsAsia, 5 April 2018

Extract 3: Singapore shoppers take 820 million plastic bags from supermarkets yearly

Singapore shoppers take 820 million plastic bags from supermarkets each year – an average of 146 plastic bags for each person, a study commissioned by the Singapore Environment Council (SEC) has found.

For context, each person in England used 133 plastic bags in 2013, when major supermarkets there gave out more than 7.4 billion bags. This was before large retailers in the UK were required by law in October 2015 to charge for plastic bags they gave out. The use of single-use plastic bags declined drastically after the charge was introduced, with 2.1 billion bags sold between April 2016 and April 2017, according to the UK government website.

The study found that 49 per cent of survey respondents in Singapore use three or more plastic bags per supermarket trip, including 14 per cent who use six or more bags on each trip. Only 15 per cent bring their own bags. Among those aged 60 and above, almost a quarter said they take six or more plastic bags per shopping trip, while only 6 per cent bring their own bags.

While the plastic bag charge seems to have worked for the UK, SEC executive director Jen Teo said reducing usage here has to start with education as it will “drive longer term benefits in terms of behavioural change”.

“In some of the countries where the charge has been introduced, there has been some reduction in plastic bags for a period of time, but over the longer term the use of plastic bags will then increase,” she explained. For instance, in Taiwan, the charge worked very well for the first two years, but usage went up again as people “got used to paying”.

SEC chairman Isabella Huang-Loh sums up. “Instead of going so far into draconian measures right now, try reduction first. Once we ask people to reduce, and once it bottoms out or there’s absolutely no way it’s going there, then we have to review the whole process.”

Adapted from ChannelNewsAsia, 31 July 2018

Questions

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(a) With reference to Extract 1,

• (i) Identify the economic relationship between bioplastics and food. [1]

• (ii) Using demand and supply analysis, explain why “the use of these plants for plastics … will likely lead to a sharp increase in food prices”. [4]

(b)

• (i) Using Extract 2, explain the economic inefficiency that arises from the use of plastic bags. [6]

• (ii) With reference to Extract 3, to what extent do you agree that education is likely to be a better measure than imposing plastic bag charges in addressing the problem that arises from the use of plastic bags? [8]

Answers

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(a)(i) — Identify [1]

Bioplastics and food are goods in competitive supply — a relationship in which producing more of one good diverts inputs (here, corn) away from producing the other. [1]

(a)(ii) — Explain, demand and supply analysis [4]

Extract 1 notes that “bioplastics have emerged as a potential alternative” to petroleum-based plastic. This reflects a shift in tastes and preferences towards bioplastics, raising the price of bioplastics and so the return to producing them.

Because food and bioplastics are related in competitive supply, farmers reallocate corn from food production to bioplastic production. The supply of food therefore decreases, shifting the supply curve from $S_1$ to $S_2$. At the original price a shortage opens up, exerting upward pressure on price and moving the market towards a new equilibrium.

The size of the price rise turns on the price elasticity of demand for food. Food is a necessity, so demand is price inelastic: quantity demanded falls less than proportionately, so the supply contraction translates into a sharp rise in price, from $P_0$ to $P_1$.

Mark allocation: correct non-price supply determinant (price of related good in competitive supply); correct price-mechanism explanation; correct PED determinant (necessity) to justify “sharp”; correct diagram.

(b)(i) — Explain the economic inefficiency [6]

The consumption of plastic bags generates a negative consumption externality.

For the consumer, the marginal private cost (MPC) of a plastic bag is its monetary price, and the marginal private benefit (MPB) is the convenience it provides. Consumption, however, imposes an external cost on third parties: as Extract 2 notes, discarded bags “end up in oceans” and are eaten by fish, “transferring it up the food chain” — harming, for example, the livelihoods of fishermen and the wider public.

Because this external cost is unpriced, the marginal social cost (MSC) lies above the MPC by the marginal external cost (MEC). The socially optimal output $Q_s$ occurs where $MSC = MSB$, but the free market settles at $Q_m$, where $MPC = MPB$. Since $MSC$ exceeds $MPC$, $Q_m$ lies to the right of $Q_s$: plastic bags are over-consumed by $Q_m - Q_s$.

Over this excess, each unit costs society more than it benefits society, so the allocation is inefficient. The resulting deadweight welfare loss is the triangle ABC.

Mark allocation: MPC and MPB identified with examples; external cost defined; divergence between MPC and MSC explained; social optimum vs free-market equilibrium; over-consumption and allocative inefficiency; accurate diagram.

(b)(ii) — To what extent do you agree [8]

Thesis. Education resolves the imperfect information underlying plastic-bag use, whereas a plastic-bag charge is a Pigouvian (corrective) tax that internalises the negative consumption externality directly. On balance the charge is the better measure for the problem as posed, though the judgement is conditional.

How education works. Many consumers are unaware that plastic-bag pollution is “transferring up the food chain and eventually into human bodies” (Extract 2). This imperfect information means consumers under-perceive the private cost of using plastic bags, so they consume where $MPC_{\text{perceived}} = MPB$ rather than at the better-informed quantity. Through public education or moral suasion, the government raises perceived cost towards actual cost, shifting $MPC_{\text{perceived}}$ up to $MPC_{\text{actual}}$ and moving consumption from $Q_m$ towards $Q_s$, narrowing the over-consumption and the allocative inefficiency.

How the charge works. A plastic-bag charge is a per-unit tax on consumption. Setting the charge equal to the marginal external cost at $Q_s$ internalises the external cost: the relevant private cost rises from $MPC$ to $MPC + \text{tax}$, the new private equilibrium where $MPB = MPC + \text{tax}$ coincides with $Q_s$, and the over-consumption $Q_m - Q_s$ — and with it the deadweight loss — is eliminated.

Evaluation and judgement. The charge is more reliable for the problem as posed, on three grounds. First, responsiveness: education is a long-term instrument that works by changing mindsets, with a long time lag, whereas a charge alters the relative price immediately and so delivers an earlier reduction in over-consumption — important for an urgent pollution problem. Second, certainty of effect: education is ineffective if consumers do not internalise the message, while a price signal changes the budget constraint whether or not attitudes change.

Against this, the charge has weaknesses Extract 3 makes explicit. Its effect can erode over time — in Taiwan “usage went up again as people got used to paying” — and a flat charge may be regressive and is set blunt, since the true MEC is hard to value. Education, by contrast, “drives longer-term benefits in terms of behavioural change” and, if it succeeds, durably lowers demand rather than merely taxing it.

On balance the charge is the better single measure for the immediate, urgent problem because it acts faster and does not depend on attitude change. But the dichotomy is somewhat false: the two instruments target different failures — information versus the externality — and are complementary. The strongest policy combines an immediate charge to curb over-consumption now with sustained education to lock in lasting behavioural change once the charge’s novelty wears off.

Mark allocation: scope and stand; analysis of education resolving imperfect information (with diagram); analysis of the charge internalising the externality (with diagram); reasoned evaluation weighing time period, certainty and durability; a substantiated judgement.