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

4 responses

  1. Throughput (of customers through the store) is an important operational issue for grocery stores in particular. Since fees can only be charged after bagging is completed, the normal flow (whereby payment occurs while bagging is done) is disturbed. To minimize the slowing of throughput, stores will need to have a bagger at each checkout stand rather than having the checker do the bagging while the customer is paying. Also, consider what happens when a customer says “wait a minute, I can get those groceries into 2 bags instead of 3″…

  2. I recently traveled to Prague, where at checkout you are asked if you would like a bag, and you purchase them with your items. It is then your job to fit them in your bags. We’re assuming that this will disturb the store’s checkout operations… really it is a matter of educating the consumer during checkout during the transition period.

  3. I am a cashier at a family owned grocery chain, and I for one don’t look forward to the complaints of the customer. We will feel the effects even though it is going to a good cause, how do you explain that on top of increasing prices? Also to answer an earlier question about the extra bagger at checkout and quantity of items in the bags. You really don’t need an extra bagger-if one at all. We do majority of the bagging ourselves except for large orders. But the extra bagger would actually be more for customer service. The bag fee would cover the cost of the bagger several times over so why not have one. As for how many items in the bag, we are taught to put as many like items in the bag and at least 5-7 items. This saves on company cost and for those who have begun this new ban on plastic bags, the amount of bags used.

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