Using economic incentives to reduce food waste

In an interesting article in The Conversation this week, Trang Nguyen and Patrick O-Connor (both University of Adelaide) looked at food waste. I found this bit of particular interest:

Currently, Australians pay for waste management through their council rates. This is a “pay-as-you-own” system.

The cost is determined by the property’s value, regardless of the amount of waste generated. Renters indirectly contribute to this cost by paying rent.

Neither owner-occupiers nor renters have any incentive to reduce waste generation when the cost is levied on property value rather than the amount of waste.

An alternative approach gaining momentum in other parts of the world is the “pay-as-you-throw” approach, such as Stockholm and Taipei. This system charges households based on the weight of their waste, usually the general waste that needs to be discarded in landfill, while the collection of food waste and other recyclables remains free to encourage waste sorting.

Recent research in Italy shows pay-as-you-throw schemes result in significant reductions in both the quantity of waste and costs associated with waste disposal in many Italian municipalities.

That a change from 'pay-as-you-own' to 'pay-as-you-throw' would reduce the amount of food waste would come as no surprise to economists. In the first week of an introduction to economics course, students learn that people respond to incentives. When the (marginal) benefit of doing something increases, we tend to do more of it. When the (marginal) cost of doing something increases, we tend to do less of it. In general, people try to avoid costs and capture benefits.

In this case, the 'pay-as-you-own' model leads to a marginal cost of zero for food wastage. It literally costs a household nothing at all to throw out a little bit more wasted food. When the marginal cost is zero, we can expect the quantity of food waste to be high. In contrast, the 'pay-as-you-throw' model explicitly increases the marginal cost of wasting food, since households need to pay for each additional kilogram of waste. When the marginal cost of wasting food goes up, people will waste less food.

This is a lesson that a lot of local government authorities need to learn. Many local authorities in New Zealand, for instance, have only a general charge for rubbish collection. There is no cost per bag (or per kilogram) of rubbish. The amount of rubbish (not just food waste) going to landfill could be reduced by charging per bag (or per kilogram). Many local authorities make residents buy a sticker for each rubbish bag. However, an even better approach would be to collect wheelie bins and to weight each bin as it is collected. The technology for this must already exist, surely.

Similarly, many local authorities in New Zealand have only a general charge for water. There is no cost per litre (or cubic metre) of water use, or per litre (or cubic metre) of water discharge. The amount of water usage could be reduced by charging per litre (or cubic metre) of water use or water discharge. Given that many local authorities face water shortages over summer, and that water infrastructure in New Zealand needs billions of dollars of new investment, we should be looking for ways to ensure that water users are adequately paying for their use.

Economic incentives are an effective tool that governments can (and should) use to change behaviour. Increasing the marginal cost could help to achieve goals of reducing food waste, rubbish, and water use.