My textbook says that sometimes producers are responsible for ensuring that their product is recycled. They are required to buy "credits" from firms that recycle their type of product. It says that the local newspaper company may be required to buy 500 pounds of credits for every 1,000 pounds of newspapers it produces. It would buy its credits from firms such as cardboard box producers that can use old newspapers in producing their product.

But I don't understand why a newspaper company should be responsible for recycling newspapers. After all, once the newspaper company sells its newspapers, they belong to the consumers i.e. readers of the newspaper. Shouldn't they be the ones responsible for making sure that the newspaper gets recycled? I guess I don't understand how the newspaper company would buy credits from the cardboard box producer and how that will result in the newspaper, which is now in the hands of the consumer, being recycled.

  • $\begingroup$ I'm not sure how widespread this is, but in London free local newspapers are often delivered to homes, whether the occupants wish to receive them or not (the business model presumably relies on advertising income). In that case it seems clear that the producer and not the recipients should be responsible for recycling costs. $\endgroup$ – Adam Bailey Feb 1 '18 at 9:40

Recycling credits are put in place assuming that the pollution after the consumption of a good is a negative externality. This negative externality affects everyone, when you have a newspaper in the streets this reduces the utility of the street for you, creating a social inefficiency. The government puts in place a mandatory correction system to correct the inefficiency: the recycling credits.

In your case, the newspaper company is producing a good that, after its consumption, will most likely be trashed. The company might very well transfer the costs of the recycling credits to consumers, increasing the price (similar to the effect of a tax in microeconomics). However, the newspapers that are not sold will also be trashed - old news dont sell.

So why do they force the producer to pay the recycling? Two key reasons. First, if the producer has higher costs, it will produce less, therefore pollute less. Second, pratically it is much easier to make one agent pay on a easily verifiable ammount, than charge thousands of consumers very small amounts. So at the end of the day both consumrs and producer end up paying and being responsible for recycling, even if the producer is the agent paying initially for the recycling credits.

  • $\begingroup$ Thanks! Once the cardboard box producer gets the payment from the newspaper company, what does he do with it? Does he use it to buy trashed newspapers? From whom? I understand that the cardboard box producer is the one who recycles newspapers into cardboard boxes, but he will get paid when he sells his cardboard boxes, so why does he have to get paid by the newspaper company as well? $\endgroup$ – Thomas Feb 1 '18 at 3:08
  • $\begingroup$ The cardboard company would receive these credits to acquire only used newspapers - from the garbage collectors, for example. The logic here is that this credit for the cardboard company ends up in a result better for society than doing nothing. $\endgroup$ – JoaoBotelho Feb 1 '18 at 12:47

Building on the description from @LimonadaPT, I'll try to make a simple example story with five players:

  1. sellers of newspapers
  2. buyers of newspapers
  3. government
  4. buyers of old newspapers/sellers of cardboard boxes
  5. buyers of cardboard boxes

Plus a "society" that includes all five of the above, plus many people not involved in any of these steps.

First, the buyers and sellers of newspapers arrive at some equilibrium price and quantity, which gives a positive "utility" to both, and thus to society in general. However, that price and quantity is failing to account for the negative externality that people who aren't buying or selling newspapers experience, such as trash in the streets.

Second, government steps in and says, hey, if that negative externality were being taken into account, then the equilibrium price of newspapers would be higher and the quantity lower. Therefore, we slap a tax on newspapers. That would lower utility to the buyers and sellers of newspapers, but raise the total amount of utility to society.

Third, we set that aside for a moment and move on to a new problem: The makers of cardboard boxes use recycled newspaper for their product, but there's a cost associated with doing so which gets reflected in the price of cardboard boxes. The cleanup of old newspapers has a positive exeternality to society, but society isn't paying for it; only the buyers and sellers of cardboard boxes are.

So fourth, government steps in again and subsidizes cardboard boxes. This lowers costs faced by cardboard box manufacturers, which raises the quantity they produce and thus the quantity of old newspapers they recycle. This raises the utility to society.

Finally, to bring it all together, imagine government uses the tax revenue from newspapers to pay for the subsidy on collecting used newspapers. Or better yet, remove government all together and just make it a direct payment from newspaper creators to used newspaper recyclers. The transaction creating the negative exeternality now pays for the transaction creating the positive externality, raising total utility in society on both ends.

Of course, this is highly simplified. I've left out, for example, elasticity and who bears the burden of a tax. But hopefully it illustrates the general idea. The fundamental point to the whole thing is that both the sale of newspapers and the creation of cardboard boxes affect people who aren't involved in the transactions, and the transfer payment forces the market to take their considerations into account.

  • $\begingroup$ Thank you for an extremely clear answer! My textbook says that the box producer is paid for using old newspapers. It also says that the price of the recycling credit is set by market forces. What does this mean? I assumed that the newspaper company would just have to give 500 pounds of old newspaper (for every 1000 pounds of newspapers it produces) to cardboard box producers. $\endgroup$ – Thomas Feb 1 '18 at 18:24
  • $\begingroup$ @Thomas From your snippet in the OP, I believe the "market forces" come from a similar setup to cap-and-trade carbon emissions. The government sets a requirement - buy 500 in credits for every 1000 you produce - but then lets the buyers and sellers of credits bargain on the price. So a newspaper firm can buy the credits from any recycler they chose, meaning the price of those credits will be set by market forces. Recyclers will have an incentive to increase efficiency. $\endgroup$ – Jeff Feb 2 '18 at 7:20

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