Feb 04 2008

Ireland gets innovative with corrective taxes

Published by at 9:11 am under Externalities,Market failure,Taxes

Motivated by a Tax, Irish Spurn Plastic Bags – New York Times

Here’s a textbook example of how government can use taxes to correct a market failure.

In 2002, Ireland passed a tax on plastic bags; customers who want them must now pay 33 cents per bag at the register. There was an advertising awareness campaign. And then something happened that was bigger than the sum of these parts.

Within weeks, plastic bag use dropped 94 percent. Within a year, nearly everyone had bought reusable cloth bags, keeping them in offices and in the backs of cars. Plastic bags were not outlawed, but carrying them became socially unacceptable — on a par with wearing a fur coat or not cleaning up after one’s dog.

A market failure existed; too many plastic bags were being used and discarded, creating negative externalities for society. A responsible government minister made it his mission to correct this market failure, and in the face of strong opposition from retailers. But guess what, it worked. Not only have they practically disappeared from the country’s retail stores, but their use has become a social taboo.

Why don’t more developed countries, where citizens can afford to care about the environment, place corrective taxes on plastic bags? Heck, why not use taxes to correct other market failures, too? How about a gas tax, for goodness sake?

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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

34 responses so far

34 Responses to “Ireland gets innovative with corrective taxes”

  1. kxc.024on 04 Feb 2008 at 8:28 pm

    In Taiwan, a customer has to pay more for a plastic bag as well. While it has worked to eliminate the use of plastic bags, there is the implication that the manufacturers and workers in these plastic factories are now either out of job or in pretty bad business. So while this tax is successful in eliminating environmental degradation, there's a price associated with it.

    Therefore, if the government decides to tax every product that has negative externality, the economy may soon be in shambles because in truth, nearly all products have negative externalities associated with them. Also, a tax on all these goods will increase the price level of the economy, meaning an inflation. Although a small amount of inflation may be good once in a while, a tax on all these goods would undoubtedly produce a huge inflation, meaning everyone ends up being worse off.

  2. Angel Liuon 05 Feb 2008 at 8:19 pm

    Although there's some cost to removing negative externalities, society pays a higher cost producing these negative externalities. Every decision that we make, or every little product has its opportunity cost. Furthermore, as a rational person, we make decisions when marginal benefit exceeds the cost so people in Ireland must have believed that using a reusable cloth bag is more socially adequate and the cost is negligible.

  3. Lauren Tayloron 07 Feb 2008 at 7:35 am

    My mom bought cloth grocery bags from Jewel. Using cloth bags has been extremely beneficial to her. She can fit more groceries in them, for one. They're sturdier than plastic bags, and she can use them for other things. She uses them nearly every day to carry not just groceries, but paperwork, food to a party, gifts, just about anything.

    I do see what the two people above me are saying, though. The opportunity cost has to be taken into account. Are people losing jobs due to less plastic bags being used? Do the factories that make the cloth bags produce more pollution? Is farmland being destroyed due to having to build more factories to make the cloth bags?

    In regards to taxing gas, right now, not all cars can use the e85 fuel. So taxing the gasoline will only make people angry. But we can't stop buying it, or start buying less, because we need it to get around. My car has to use the regular gasoline, so taxing gas wouldn't stop me from buying it.

  4. Fábioon 07 Feb 2008 at 8:49 am

    The bags' tax not only corrects a market failure but also its revenue allows the government to reduce corporations' profit taxes… Just kidding.

  5. frskniamon 07 Feb 2008 at 9:54 am

    The negative impact of loss of plastic bag production is liken to us being afraid of saying smoking is bad and taxing cigarettes because it will hurt the tobacco farmer. The harm to society and it's people far outweighs the benefit. Go Ireland.

    About the gas tax. It will cause you to think twice about spending your money on a inefficient car, and will be more likely to purchase a vehicle that uses less. You might not see it for you personally, but on a macro level the results are staggering.

  6. Conrad Liuon 08 Feb 2008 at 1:15 pm

    No action goes without consequence. In this case, placing taxes on the use of plastic bags does indeed help remove the negative externality associated with plastic bags, with people beginning to use other kinds of less-damaging bags. Unfortunately, in doing so, companies responsible for making plastic bags are no doubt severely crippled by the disuse and social distaste of plastic bags.

    Specifically, a gas tax is not a viable solution to removing the negative externality it creates, as the only cars that do not require gas are incredibly expensive, far too much for the average household. However, most individuals in a developed country like the United States do not support additional taxes because they don't look at it in a macroeconomic way; they don't realize that a negative externality is taken away. At least, this could be a somewhat plausible explaination.

  7. Erin Hegartyon 08 Feb 2008 at 9:48 pm

    I think Ireland is very smart in this move that they made. While there are negative immediate consequences to this decision; jobs lost by people at the plastic bag company, maybe a more higher cost to make these cloth bags, but I think the positive long term consequences far outweigh the bad.

    With the new cloth bags, they may be more expensive to purchase at first, but less will need to be produced at factories, and that would lead to possibly less money spent on grocery bags, and more on something of superior importance. Plastic bags get used, and then either thrown in the garage somewhere or thrown in the garbage, whereas the cloth bags will be put away, and pulled out the next time they need to be used. With nicer products (the bags), people will take better care of them and reduce the amount of garbage they throw away by say 10 plastic bags each week, also doing their part to reduce the large amount of waste humans produce.

  8. kevinyehon 10 Feb 2008 at 12:27 am

    The plastic bag tax really helps environmental awareness because even people who don't really care about the harm it has to the environment do care about the harm it has to their pocketbooks, so it helps to correct the negative externalities

  9. TimChuon 10 Feb 2008 at 6:41 pm

    I think it's pretty interesting that it worked with something like a plastic bag. However, placing corrective taxes on something as essential as gas doesn't seem like it would work. While taxing does decrease sales, the cost of staying with the gas is far less than buying a new expensive hybrid car. The tax would have o be quite big to work and doing so might exclude some poorer social classes from private transportation.

  10. jacqueszhangon 10 Feb 2008 at 11:03 pm

    Wow, never quite thought of plastic bags that way. I was in France just last winter and I went to the super market, only to find that they don't even supply plastic bags AT ALL. Pretty annoying at first, as we kind of had trouble bringing everything back. We did end up using reusable bags of all sorts. It never occurred to me as an economic move to reduce the use of actual plastic bags though. I obviously won't be complaining next time I go back.

    Gas tax isn't as obvious as a solution. The thing is, plastic bags have substitutes: reusable canvas bags and etc. Cars CAN be replaced by things such as bicycles and the such, but it's just not quite as useful as the car itself.

  11. MichaelChowon 11 Feb 2008 at 12:02 am

    The example of how the Irish placed the tax of 33 cents is similar to the Taiwan's charge on plastic bags in the current day. Both result in the same outcomes which is only for the good of the environment. For Taiwan the charge of 1 NT is not a lot at all, but on occasion the customer may not have that extra 1 NT to spare so they adapt to the situation and prevent the use of plastic bags. I believe this choice on taxing plastic bags is an extremely smart idea for the well being of the environment.

  12. optional.xuon 11 Feb 2008 at 4:14 pm

    This plastic bag tax is pretty revolutionary in that it had such a big corrective response but a gas tax I think would be political suicide in somewhere like the United States.

    If any politician were to even MENTION upping the prices of gas in an attempt to decrease usage, he/she would be crucified. Americans are too conservative to simply go from a oil-based economy to a similar 94% reduction in gasoline usage. Change is very unwelcome in such a place where immigration laws and abortion are already heavy issues.

    I think that a gas tax would be opposed vehemently by the general public because 1) conservativeness 2) lack of public education about environment welfare and just general apathy.

  13. Charlie.Gaoon 11 Feb 2008 at 5:19 pm

    Yes I agree with David in that a gas tax would be detrimental to developed societies such as the US. Americans are already complaining about the ridiculous gas price and if the prices were raised even more, I would really advise President Bush to add a few more bodyguards. The intention of reducing pollution may not even occur, and instead there may be increased riots.

  14. Richard T.on 11 Feb 2008 at 6:25 pm

    In this case, a tax on plastic bags sure help improve society's negative enternalities, and even though it costs more to produce the durable plastic bags, society's is better off in the long-term.On the other hand, placing a gas tax would not help society much. Automobile in this current society is a far too common transportation. If the government place a gas tax, people wouldnt buy those electric or hybrid cars, they are overly expensive, and not affordable for most consumers. Thus, in order to reduce cost, they would reduce the use of cars, and this might just lower the productivity and efficiency in the whole society.

  15. Jessica Ngon 11 Feb 2008 at 7:23 pm

    This reminds me of the plastic bag charge in Hong Kong supermarket on "no-plastic-bag-days." It's only 10 cents so it didn't really affect people's consumption of plastic bags all that much. It hasn't yet become a social taboo but it is obvious that people are begining to use more environmentally friendly bags when they go shopping, or not use bags at all. So I guess it's always a good start.

    But taxing gas is a much more complicated issue, as there are no clear, equal-cost substitutes for gas. I can't imagine what the protests would be. Any politician who even faintly suggests the idea is on a road to political suicide.

  16. Jeewonon 11 Feb 2008 at 7:38 pm

    Using taxes on plastic bags successfully corrected negative externalities. People found reusable cloth bags to use as an alternative, and now there is less harm being done to the environment. However, gas taxes would not be the best solution, since it is not easy to find a substitute. Gas taxes will simply result in less use of cars.

  17. kevinchiuon 11 Feb 2008 at 8:58 pm

    Interestingly enough, I just came back from Taiwan, where 7-11 charges customers if they want a plastic bag; my solution was simply to just buy a plastic bag once and re-use that plastic bag. Thus, the fact that the tax on plastic bag can correct a market failure by deterring consumers away from them is not so shocking. Gas taxes will not deter consumers to a substantial degree because gas is a necessity for most and cannot be simply replaced.

  18. Margaret Liuon 12 Feb 2008 at 1:23 am

    This tax has also been taken up in Taiwan, which I believe is a rather developed country, since 2000 (I think).

    As wonderful as this tax may seem, too many of these similar taxes could give rise to something like rebellion. In short, we don't like being taxed.

  19. judychenon 12 Feb 2008 at 2:09 am

    I think it's a really smart policy. In Taiwan, the government has been encouaring this policy as well. They made us to pay one NT to buy one plastic bag. However, not many people in other cities has this habit. When you go to rural in Taiwan, most of stores still give plastic bags for free. So I think, the idea of saving the earth is not so spreaded out in Taiwan. I think not only Taiwanese but also people in other countries should learn the good habit of carrying reusable bags along as Irish does.

  20. Chan Min Parkon 12 Feb 2008 at 11:52 am

    Everyone seems to be Taiwanese here, so I also want to mention how Korea also charges money for plastic bags. As Kevin Chiu mentioned necessities, I think it is very important in determining whether the product should be taxed to correct the negative externalities. Plastic bags are not really a necessity, and therefore taxing it would drastically decrease its use. However something like gas or cigarettes, taxing the product will not immediately correct the externalities.

  21. Dana Y.on 12 Feb 2008 at 1:04 pm

    As Chanmin mentioned previously, South Korea had administered charging money for plastic bags ever since I was a 1st grader.Whenever I visit Korea in the summer, it is commonplace to see all my relatives bring their own bags to grocery stores. Thus,I believe this particular tax is noteworthy as it not only dramatically lowers the cost and the effort that goes into making plastic bags, but also because this measure is very environmental friendly. However, it is true that it does not get rid of the negative externality. But I believe a gas tax is a bit unrealistic as we are heavily dependent on it. As Jeewon said, there are not many alternatives to gas, unless you have a hybrid car.

  22. Alex Goldmanon 12 Feb 2008 at 2:36 pm

    In Europe as well, people must pay for plastic bags. This isn't a tax in the sense that there is an extra charge on top of the original price, but it does have the same effect – it shifts the demand for plastic bands left. This reduces negative externalities, and leads to a cleaner environment. Gas taxes could be effective, provided that people could easily transition to an alternative energy, such as electricity. However, if a fuel or coal tax was made in a country such as China, many people would go without energy because they have no other means of energy.

  23. Jack Loon 12 Feb 2008 at 4:24 pm

    I'm going to repeat what half the people have already said: Taiwan also charges for plastic bags. I think this policy is actually quite effective. I was just in Taiwan over the Chinese New Year break, and almost no one uses plastic bags anymore. The only plastic bags I have seen are the ones that have been reused over and over.

    A gas tax would be ideally beneficial to the environment. But realistically, could we really survive with a gas tax? We are so dependent on gas as an energy source abd it would be very difficult to find a new source of energy in a short amount of time.

  24. Alice Suon 12 Feb 2008 at 5:12 pm

    So i just wanted to point out that HEY mr. welker you have non-SAS people commenting on this blog too! That's pretty cool. Random, but cool. Well ok I also have something to say about the article itself haha as I read it I was thinking about how, like Jacques, when I went to France a few summers ago, they didn't provide plastic bags at all and we had to carry everything home by hand. It was tedious, but a good move to reduce negative externalities, and it wasn't much of a hassle because we just learned to bring a cloth bag the next time. Taxing gas, on the other hand, would not be so simple because it's not as easy to find a substitute for gas as it is for plastic bags. I think there are other kinds of measures the government could take that would be as effective as taxing plastic bags, however–for example, charging an extra tax on households that use more than a certain amount of electricity in a day, or rewarding schools and firms that recycle a certain amount, etc. Like kevin said, it's hard to get people to be environmentally friendly because they just don't care; once something affects our pocketbooks, however, it becomes entirely different and important.

  25. Jeff Yeon 12 Feb 2008 at 5:56 pm

    Although taxing plastic bags in this case was a successful idea, this may not be so with everything that carries a negative externality. Taxing gas would make the gas more expensive, but it wouldn't decrease the amount of consumption by very much, because the demand for gas is quite inelastic. Some people might switch to public transportation, biking, or even walking, but most consumers would still pay the higher price for their gas.

  26. Christina Huon 12 Feb 2008 at 6:53 pm

    Haha, Ireland is awesome!

    But any sort of action comes with consequences, both good and bad. The tax undoubtedly caused many plastic bag manufacturers to experience cuts in wages or even lay-offs. However, the benefits of this tax (no more negative externalities from the use of) probably outweigh the costs (workers affected), so the tax is still, all in all, good for society.

  27. Nicole Wongon 12 Feb 2008 at 9:34 pm

    It seems as though this idea is spreading around the European area! The supermarkets in Netherlands had the same idea while I was living there, though I'm not so sure the "social taboo" applied there as well. This concept would undoubtedly be harder in reinforce in China though, taking into account the millions of stores there are that use plastic bags. Even those little stores at Yuyuan use them. It is possible, though, that China could eventually get there.

  28. mina.songon 13 Feb 2008 at 1:43 am

    I China absolutely need this tax, too many plastic bags and I think china should start to think about its environments isn't it?

  29. serenatuon 13 Feb 2008 at 4:43 pm

    In Taiwan, when you go to a grocery store, you will have to buy one of those reusable bag to put your stuff in. All the convenient stores don't provide plastic bags for free anymore. Some stores in Beijing are also starting to take action regarding this problem too, no more plastic bags, unless you bring your own otherwise it's for sure you need to buy one. It's not simply placing a tax, you "need" to buy one. I think either placing a tax for making people buy the bags is helping the environment, reducing pollution, making the living area a better place to live. πŸ™‚ cheers.

  30. Trevor Sunon 13 Feb 2008 at 9:48 pm

    I've never been to another place that uses as many plastic bags as China. Worse yet the ones they use here in China suck and it doesn't help that people in China are so used to just throwing things on the ground. I think they need a really big tax for using plastic bags so that people will for sure stop using them.

  31. Jessica C.on 13 Feb 2008 at 9:59 pm

    I think this is a good idea!! As Cassy, said convenienence stores in Taiwan don't give out plastic bags anymore. Although sometimes it gets frustrating, it is a huge step in helping the environment. Wow, people really ARE motivated by money. However, we really don't need so many plastic bags. For example, if I buy a bag of chips, I can simply hold the chips; I really don't need the plastic bag. I think if the government really started charging people for polluting the air or for using extra (unnecessary) napkins in restaurants, the amount of pollution and trash we produce would decrease significantly. I think someone somewhere said that Carrefour here is going to stop providing plastic bags soon too…not sure.

  32. andyxuon 13 Feb 2008 at 10:26 pm

    Contrary to the posts above, I don't think China needs such ridiculous tax.

    If there is a market for plastic bags, meaning there is high demand, why a China, which currently value GPD growth slightly more than environmental protection, want to make such a illogical tradeoff?

  33. Stacy Dwyeron 14 Feb 2008 at 1:54 am

    This is a perfect example of the government messing with part of the economy, even just a microeconomy, and getting unexpected results. When the government adds heavier taxes or subsidies, many things are effected, not just the intended market. In refrence to this article, the demand for plastic bags not only droped, but plummeted because of the rasied price. This completely ignores the law of supply and demand. When The demand for a good goes down, the price should also go down, but this doesn't happen when politicians get involved, and muck up the natural of order.

    The reason why more developed countries, where citizens can afford to care about the environment, place corrective taxes on plastic bags, is becasue of the unseen consequences. Although it sounds like a good idea, messing with the natural workings of the economy is not a good idea. No plastic bags mean people have to use cloth bags. Because the cloth is being used in the bags, it can not be used in clothing or your car's interior, this makes the good, cloth, more scarce, which in effect makes everything else, that uses cloth more expensive. This is just an example of one of the unseen consequences.

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