Feb 07 2011

Internalizing externalities: Zurich’s expensive garbage

This post is about how Switzerland has successfully employed an innovative system of incentives to encourage its citizens to reduce the amount of garbage they create. Just three weeks in this amazing country and I can already see why it earned the highest score in last year’s Environmental Performance Index.

In the AP and IB Economics units on market failure, we study the concept of negative externalities, which exist when the behavior of one individual or firm creates spillover costs to be faced by other individuals or society as a whole. A simple example is a factory that dumps waste in a river. Clearly, disposing of its waste in such a manner poses little or no cost on the factory owners, but significant costs on downstream users of the river’s water. A community that wishes to use the river for drinking water must now install expensive filtration and purifying systems just to make the water usable. The factory has kept its own costs down by externalizing the cost of filtration by passing it on to downstream users.

Spillover costs exist on micro levels as well. While it is easy to see how a large factory creates negative externalities, it is often harder to imagine how we as individuals create spillover costs for our neighbors and society in our everyday actions. The stark truth, however, is that an individual’s behavior, multiplied by millions upon millions of individuals making up a citizenry, can have as great if not greater negative impacts on the environment and society as the negligent behavior of one firm.

Here in Switzerland, the behavior of each individual citizen is subject to unusually strict scrutiny. No, Big Brother is not watching, as you may be thinking, (however, I have heard stories of snoopy neighbors alerting the police upon witnessing the most minor of infractions by a fellow citizen), rather, one finds it in his best economic interest to strictly monitor his own behavior down to the finest detail. Allow me to explain what I mean.

Let’s take garbage for example. The definition of garbage in Switzerland is very different from that in the United States. Where I’m from, garbage is anything that you can’t use anymore. You throw it “away”, put it on the curb and it disappears.

A garbage bag in the US is usually a 40 gallon (160 litre) plastic bag that could fit an entire family inside, and the typical American family probably produces two to three bags worth of “garbage” each week, which conveniently disappears in the wee hours of the morning to be taken “somewhere”, which most Americans don’t know or care to know where that is. How much does it cost an American household to dispose of this voluminous quantity of garbage? Well, the bags cost around 18 cents each, and monthly removal services vary depending on the community, but are typically a flat rate for almost any amount of garbage.

In the United States, it is very easy for individuals to pass the true cost of their garbage disposal onto society as a whole. It doesn’t matter all that much whether you put one tiny plastic bag on the curb or a half dozen 40 gallon bags on the curb, you are going to generally pay the same amount for collection regardless. The result of such a system is that the typical household has no incentive to reduce the amount of garbage that it produces. Logically, Americans are inclined to over-consume and produce copious amounts of garbage in the absence of any significant system of incentives in place to encourage waste reduction.

So, what’s different about Switzerland? It’s all about incentives. Let me explain. Here, you don’t pay a flat rate for garbage removal. In fact, you don’t HAVE to pay anything for garbage removal! Oh wow, you say, it’s FREE? In fact, quite the opposite is true. You don’t have to pay anything for garbage removal as long as you don’t create any garbage. In other words, you only pay for what you throw away.

Unlike in the US, here a typical garbage bag here is a 35 litre plastic sack, only slightly larger than a plastic grocery bag. Each village requires its citizens to buy official garbage bags for that community, and each individual bag costs anywhere from $1.50 – $2.50. A role of ten 35 litre bags can cost around $25.

When we consider that anything a household wishes to throw away must be put in an official village garbage bag which itself must be purchased for $2.25, and we know that a typical 40 gallon (160 litre) garbage bag in the US costs just $0.18, we can easily calculate and compare the costs of garbage disposal to both US and Swiss households.

  • In Switzerland: 100 litres of garbage costs $6.40 to dispose of
  • In the US: 100 litres of garbage costs a little over $0.11 to dispose of
  • In other words, garbage removal costs Swiss households around 57 times as much per litre as it does Americans, when we consider the price of garbage bags alone.

Clearly, Swiss households are given a significant incentive NOT to create garbage. So what DO the Swiss do with lots of their waste? Recycle it, of course! See, here in Switzerland all recycling is free. The villages even offer free curb side pick-ups for all recyclable materials.

A simple system of incentives (and dis-incentives) is the secret to Switzerland’s environmental success. Other systems are in place to encourage citizens to use public transport, tread lightly while hiking in the outdoors, conserve energy and water at home, and behave in other environmentally friendly ways, but I’ll save my discussion of those items for another time, once I figure out how to reduce, re-use and recycle all my own “garbage” here in Zurich!

Discussion Questions:

  1. How does Zurich’s system of garbage collection “internalize” the “externality” associated with household consumption?
  2. Incentives matter. This is a basic economic concept that can be used to fix many of the environmental, social, economic and health problems faced in society. Identify one way your parents have used incentives to try to get you to do something or NOT do something they think you should or shouldn’t do.
  3. Discourage what society want less of, encourage what society wants more of.  Identify and discuss one example of a market in which a government (local or national) uses incentives to discourage certain behaviors, and one example of a market in which incentives are used to encourage certain behaviors.

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

45 responses so far

45 Responses to “Internalizing externalities: Zurich’s expensive garbage”

  1. Horia Stanescuon 24 Aug 2008 at 11:46 pm

    I believe some of the greatest benefits of recycling are the hidden ones. Sociologists have done studies which concluded that people feel good about themsleves when they recycle. In the USA, more people recycle than vote.

    The interesting thing about recylcing is that in most cases, recycling a product actually takes more energy than having to create that product from scratch (not true for aluminum cans). There are a number of companies which make a profit by taking garbage (for example, plastic bottles), grinding them into plastic pellets and selling them to other industrial firms.

    From experience I can tell you that recycling anything that isnt plastic/glass/paper or cardboard costs money. Even giving away old clothes to be sent to people in need in various countries in Africa they charge for.

    In the US, having someone collect your separated garbage for recycling is roughly three times the cost of having someone take your garbage to a landfill (where decomposition of organic material would release methane gas to be collected and put to further use). The recycling industry in the US alone is subsidized 8 billion dollars per year. Even though on the average it would still be cheaper to produce new goods than to recycle new ones, the US government continues this methodology of produce separation and recycling. One counter argument to anti-recyling is that it creates a demand for unskilled labor. An increase in the employment rate would benefit the economy as more people would be able to generate revenue and spend it on other goods, improving the quality of life of all involved in this process.

  2. Jabba Gehringon 14 Sep 2008 at 8:15 pm

    Horia Stanescu wrote: "Sociologists have done studies which concluded that people feel good about themsleves when they recycle." And I totally agree on that. I used to throw garbage on the street when I was younger until I saw a person in the park picking up all the garbage that people threw on the ground instead of walking 10 meters to the next garbage can. I realized how you can make other people's live easier by just putting your trash to where it belongs. Today I even get mad when I see people just throwing their trash on the streets. People just have to put themselves in the place of the garbage-guy that has to pick up their trash.

  3. Kreminon 17 Mar 2009 at 4:58 am

    In my opinion, this is a very good way of internalizing costs. As discussed in Class, it is better than the Lump sum way, as it is marginal. People will now think about how much garbage they produce as they have an incentive (ie. lower costs) to not produce as much. This saves money for everyone: Canton, Tax payers and also the Government. Also, as stated, it reduces (or at least should) the amount of garbage being produced.

  4. Hannah Barkanon 17 Mar 2009 at 11:14 pm

    Incentives are definetly the reason for the reduction of garbage in Switzerland. They have made it cheaper to recycle than to throw away your garbage, which encourages people to recycle more. In England its the opposite, so no one recycles. It is much more expensive and more complicated to recycle in England, where as to throw your garbage away costs next to nothing. Although like Horia said, in all countries it costs something to throw away large items, if a country makes it harder to just 'throw' things away, people will have an incentive to recycle more.

  5. Neil Elrickon 11 Feb 2011 at 10:04 am

    Hi

    This is something tha thas been going on in Taiwan for a while. The BBC have done a nice little news snippet on it which can be found here. It also discusses some unforseen External benefits from the scheme.
    http://www.bbc.co.uk/news/world-asia-pacific-1224
    Neatly explains how the system works.

  6. Philip Behrendson 25 Feb 2011 at 10:22 am

    1. The Externalities of personal garbage in Switzerland is internalized through giving the citizens incentives to produce less waste and recycle. These take the form of charging high prices for the only allowed garbage bags and making recycling and pick up of recyclable items free. In contrast to american homes, it now costs more to produce more waste and hence people will be discouraged from doing so.

    2. My parents have used incentives through pocket money, as when I was young I would get a little bonus if i cleaned up my room a number of times. Additionally, taking out the dog, bringing out the garbage and other chores would all add up to a tally which in the end determined whether I received the full amount of pocket money or not.

  7. Tim B.on 25 Feb 2011 at 10:39 am

    1.How does Zurich’s system of garbage collection “internalize” the “externality” associated with household consumption?

    – In Switzerland citizens only have to pay for the garbage they produce. Therefore the people are engaged to produce less garbage. People living in Switzerland have to pay for each bag of garbage they want to "through away". Additionally, recycling in Switzerland is for free, which engages the citizens to recycle more of their trashes and through less garbage away. In contrast to Switzerland, the system of the US is based on a monthly payment to the government for all the garbage which is produced in the Household.

    2. Incentives matter. This is a basic economic concept that can be used to fix many of the environmental, social, and economic and health problems faced in society. Identify one way your parents have used incentives to try to get you to do something or NOT do something they think you should or shouldn’t do.

    – When I was younger, my parents used the incentive of pocket money. They would increase the amount of my pocket money by a little, if I would repair my bike outside the house and not in the basement, as it took up a lot of space and made t difficult to move in the basement for others.

  8. Markel Zuritaon 26 Feb 2011 at 5:49 pm

    How does Zurich’s system of garbage collection “internalize” the “externality” associated with household consumption?

    – Zurich's system of garbage collection internalizes the externalities associated with household consumption by providing incentives to recycle. Since in Switzerland, households are only charged for the waste they produce so they therefore try to produce less to lower the charge.

    Incentives matter. This is a basic economic concept that can be used to fix many of the environmental, social, economic and health problems faced in society. Identify one way your parents have used incentives to try to get you to do something or NOT do something they think you should or shouldn’t do.

    – My parents have used the incentive of giving me more money for getting better grades. The incentive encourages me to get better grades as I know I will be rewarded for my hard effort.

  9. Geoffroy the Frenchion 02 Mar 2011 at 2:12 pm

    1. Well the Zurich system makes you pay a lot for garbage bags so that people are discouraged to consume many. This creates a reduction in the negative externalities which is not recycling and just throwing everything in the trash.

    2. My parents will only pay for me to do the sports I love so much if I keep good grades. So they are "subsidizing" me with something I want so that I keep good grades. The only difference with my parent and government is that instead of a direct payment my parents give me something I appreciate as much and as a result I increase the positive externality of getting grades.

    3. One example of incentive is recycling in America, people are paid around 10cents for every can that they recycle. This is subsidizing recycling in America, causing to increase the positive externality.

    One example of discouragement is the extremely heavy tax on cigarettes, its make people smoke less than they would normally if cigarettes were really cheap. This taxing causes for a reduce in the negative externalities.

  10. cyon 29 Jun 2011 at 4:26 pm

    recycling may be encouraged and properly incentivized, but it is not free. the men don't work for free, the garbage or recycling trucks are not free, the sorting is not free, etc.

    this system seems to be very little about environmental economics and more about subsidization and social control.

    you've confused environmental economics with a story about environmental quality. there is no mention of the "social cost" of landfills.

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