Pricing of Externalities is Upon Us

externality.jpgSan Francisco is the first city in the U.S. to have implemented a plastic bag ban, but there are many other cities up and down the west coast and across the nation who have enacted or are discussing similar measures (including Seattle, Los Angeles, Portland, and New York). As opposed to S.F.’s ban on plastic, most cities are planning to charge a fee for use of disposable or single use bags, both plastic and paper. The fee-based approach was initially introduced in Ireland, and according to the Irish government has been successful in reducing the use of disposable bags. In the U.S. the cost of the fee will vary by city, but the norm is $0.25 per bag. This cost will be paid by the consumer at time of checkout, and a large portion of the proceeds will go towards pollution and litter cleanup efforts.
There are several stakeholders involved, most notably municipal government, retailers, bag manufacturers, and consumer groups, making for a very dynamic environment. But perhaps most interesting of all is the fact that this may be the U.S. consumer’s first direct introduction to a new concept that will soon be a staple of the U.S. economy – the factoring of externalities into the cost and price of products. For many businesses, this impending change is frightening in both its intended and unintended impacts.

From the retailer’s standpoint, there is concern that the consumer will have a negative perception of their store when they are charged a relatively high fee for something that until now was deemed as free (even though, of course, the cost of bags was always factored into the cost of products). But there are likely to be unintended impacts as well, such as a slow down at the checkout counter and the need to have more baggers at the checkout stand; indeed, the overall costs to the retailer are likely to far exceed the amount of fees placed on the bags themselves. Ultimately, the retailer’s experience with bag fees will be an introduction to uncomfortable changes that will occur across multiple industries as the cost of externalities is factored into the cost of doing business.
Actions taken by city, state, and the federal government are being watched closely by many industries, from energy (carbon cap & trade) to electronics (electronic waste recycling) to just about any industry that ships products (limitations on packaging materials like styrofoam). And these actions, already emboldened by the growing environmental awareness among businesses and consumers, promise to accelerate with the new Obama administration. In addition to the hard costs of externalities, the unintended costs of compliance point to significant complexities in the transition to a new economy that will increase costs from the point of resource extraction through to the consumer.
eco-unit.jpgKent Ragen is CEO of EcoUnit, the rewards program for eco-conscious consumers. Learn more and become a member at