Trash Talk

I recently moved from Philadelphia, where trash and recycling pick-up are included in property taxes, to a smaller town where my taxes cover recycling but not trash pick-up. The waste management companies where I currently live offer several pricing options for garbage collection:

1. Pay-by-weight at the dump: The catch is that there’s a minimum $15 fee, so you need to generate lots of garbage to make this worthwhile.

2. Pay-by-the-can pick up: You pay a nominal charge, usually about $3-$3.50, per 33-gallon trash can. Under this option, your fee fluctuates directly with the amount of garbage you produce.

3. Flat rate: You pay a flat monthly fee of say $10, and this includes only 1 trash can pick-up per week. If you have more than one can, you pay an additional fee, but if you don’t have any trash, you will not receive any credit for future collections. This service makes sense if you reliably generate 1 can per week.

I decided to go with option two: pay-by-the-can pick up. Each Tuesday morning, I put out my 33-gallon trash can (if it’s full), and the lowest cost trash company I could find ($3.00 per can) comes to collect. The window in my home office overlooks the road, so I typically hear any cars and trucks that drive by. To my surprise, I heard five different waste management trucks drive by my house in one day! My immediate reaction was: How can this be efficient? Surely there are economies of scale to trash pick up?

Consider the following simple example. Suppose there are four houses located along Country Road. The road is a one way street, so the only way to drive by any of the houses is to drive east along Country Road, passing by all four houses with any trip. If a trash collection company is hired to pick up trash for House 1, what are the additional costs associated with picking up trash at any of the other three houses?


One could argue that the additional costs are negligible. In other words, the cost of picking up trash at the first house is high because you have to have a trash collection truck, a worker to drive it, a worker or two to collect the trash, fuel, etc. But once you’re out on Country Road, the marginal cost of collecting trash from the surrounding houses is just the wear and tear on the truck’s brakes, a slight wage expense to your workers, and the cost of taking care of the additional waste (such as bringing it to the local dump).

It’s probably true that the average cost curve for a trash collection company is not strictly downward sloping since once a certain number of houses are served, the company would need to obtain additional trucks and workers. I would still argue that there are economies of scale for trash collection companies once they enter a particular neighborhood. It seems silly to me that in a given week I see at least ten different trash collection trucks drive by my street.

Wouldn’t it be more profitable for all companies if they each monopolized a small region? The additional cost of collecting trash from a neighboring house must be smaller than the additional cost of servicing a house in an entirely different neighborhood. Even without changing prices, revenue would probably remain constant while costs would decline, leading to higher profits for each firm.

Discussion Questions

1. What kind of market structure does trash collection represent? If the city decided to step in and control trash collection for my town, what pricing options might it choose?

2. Do consumers benefit at all from having several waste management companies to choose from with different pricing schemes?

3. If the city allowed waste management companies to “monopolize” particular neighborhoods, how might this affect the market? What are the effects of competition on prices, welfare, and pick-up quality (such as timeliness, effectiveness, etc)?

4. Given the number of trash collection companies in my neighborhood, what does this say about the profitability of this industry? If the town does not have strict anti-trust laws, would it be profitable for one firm to buy out all the others? What problems might arise if only one firm controlled trash collection for my entire town?

O.K. Consumer: Pick Your Price

I love Radiohead. Really, love. I still remember sitting in my car in the record store parking lot with one of my best friends, listening to their fourth record, Kid A, all the way through—in awe. That record took Radiohead, and rock music in general, in an unexpected direction. And true to form, Radiohead is again doing things a little differently with their latest effort, In Rainbows, releasing October 10. But this time, the surprise isn't the music itself—it's how they plan to deliver that music to the world.

Recently freed from their ties with the record label EMI, Radiohead has decided to release their latest album in two ways: as a disc-box containing the CD, vinyl, and various Radiohead goodies—available for ₤40 (about $81)—or as a download. The interesting aspect of the download option is that you can pick your own price. $0? Fine. $80? Fine. You pay whatever you want.

To find out more, check out Shane Richmond's recent column, "How Radiohead killed the record labels," and this NPR interview with Tyler Cowen of George Mason University.

Discussion Questions

1. Why would Radiohead put itself out there like this? If past releases are any indication, there are certainly millions of consumers willing to pay normal price for a new Radiohead album. But will they pay, given the choice? Like me, some fans will pay willingly, deriving some degree of benefit from knowing that they're compensating a great band for its creative efforts. You know that feeling you get after you've given a good tip? That good feeling usually comes from visible tipping—that is, the recipient knows who you are. Paying for the download, by contrast, is anonymous. How might this affect what people actually pay?

2. I certainly wouldn’t be blogging about this album if it were $9.99 on iTunes. Even as non-fans read about this, they may be curious enough to check out the Radiohead site. They may even listen to a song or two. Maybe they'll like it enough to cough up some money for the download, or maybe they'll buy the disc-box, or a concert ticket, or a T-shirt. What is Radiohead’s marginal cost of offering one more digital download for sale; what is the marginal benefit to the band of having additional listeners? Might a broader fan base generate enough revenue to more than make up for the revenue the band forgoes by not selling downloads at a standardized price?

3. A firm engages in perfect price discrimination when it charges each consumer a price equal to his or her individual willingness to pay. How is this effort similar to price discrimination? How is it different?

4. How much will you pay? You would maximize your consumer surplus by paying nothing. But can you stomach it? Does a self-selected price of $0 bring along with it an intolerably high price in guilt? Along these lines, how will the prices paid by the dedicated fan differ from those paid by the casual observer?

Tiger Conservation Revisited

Can we save wild tigers by selling off the parts of their domesticated cousins? Aplia Econ Blog wrote about a New York Times op-ed by Barun Mitra several months ago (see archived link here). Citing the failure of poacher crackdowns and bans on traditional medicine products made from tiger parts, Mitra argued that legalizing trade in tiger parts would eliminate the strong black-market incentives to poach wild tigers. For example, Mitra wants to legalize the sale of body parts taken from farm-raised tigers in China after the tigers pass away. The Chinese tiger "farms" are zoos of sorts, where tourists pay to snap pictures during feeding time.

The basis for Mitra's controversial proposal? Supply and demand. Legalizing the sale of parts from domesticated tiger carcasses would lead to a sharp increase in the supply of such parts to the traditional medicine market, and a subsequent decrease in the prices of products containing tiger parts. The lower prices for tiger-based products, argues Mitra, could significantly weaken the incentive to poach wild tigers. Revenues from the legal market for tiger-based products could even go toward anti-poaching efforts and habitat conservation.

Not so fast, replies Australian economist Richard Damania.

In a recent NPR story on Mitra's proposal, Damania argues that Mitra forgot to consider the demand side of the market. Follow the link to read NPR reporter John Nielsen's write-up of Mitra's proposal and Damania's rebuttal.

Graph I shows the effect of legalizing the sale of body parts from tiger-farm carcasses in the absence of any demand-side effects. As Mitra suggests, the injection of legitimate supply would lower tiger-part prices and weaken the incentives to poach wild tigers. Damania, however, reminds us that the legalization of a formerly banned product would likely increase the demand for that product, since black-market consumption poses legal risks for buyers as well as sellers.

Graph II shows one possible outcome in the event that Mitra's legalization proposal affects both supply and demand in the tiger-parts market. Because more people demand the legal product, the demand shifts to the right and, in this case, wipes out any downward price pressure from the initial increase in supply.

Discussion Questions

1. Taking the demand-side effects of Mitra's proposal into consideration, how do the potential impacts on poacher incentives change? How would the proposal affect poacher incentives if the demand-side effects were stronger than the supply-side effects? That is, how would the incentive to poach change if the proposal caused a bigger shift in demand than in supply? What if the demand-side effects were relatively weak compared to the supply-side effects?

2. Mitra and Damania echo arguments made whenever policymakers consider legalizing a hitherto illegal good or service that many people view as distasteful, dangerous, or taboo. For example, proponents of legalizing drugs argue that the legal drug trade will be safer than the illegal trade. Opponents argue that legitimizing drug use will increase demand--wiping out potentially positive effects on safety.

How is the market for marijuana different from the market for tiger parts? Do you think the legalization of marijuana in the United States would have a greater impact on the supply side or the demand side of the marijuana market? How do penalties for marijuana consumption differ from those for distribution? How do the differences affect your analysis of legalization in the market for marijuana?

3. According to the NPR story, Damania claims that the cost of poaching wild tigers will always be lower than that of raising domesticated tigers on a farm. According to Damania: "That gap is so wide that it can never be closed, even if you factor in the cost of hunting down a tiger in the wild."

Recall that the tiger farms currently exist to attract camera-laden and somewhat bloodthirsty tourists hoping to see the animals feed on live prey. When the domesticated tigers die, their carcasses are destroyed, since the sale of parts is illegal. Is it accurate for Damania to count the entire expense of raising a domesticated tiger as the cost of providing tiger parts in the marketplace? How do you think the costs of poaching wild tigers compare to the marginal cost of providing tiger parts from a carcass on a tiger farm?

4. As the NPR story suggests, poaching is not the only thing threatening wild tiger populations. Habitat encroachment by humans puts pressure on wild tigers as well. Do you share Mitra's optimism about using proceeds from a legal market in tiger parts to finance habitat conservation? If not, what other types of incentive-based policies might help the tiger?