The Market Failure of Plastic Bags

This post is part of a blogging series by economics students at the Presidio Graduate School's MBA program. You can follow along here. 

By Jourdan Phillips    

Plastic bags were initially introduced to the US market in the 1950s for packaging items such as bread loaves.  In the 1970s, product utilization went mainstream as a shopping carrier bag to rival/replace paper bags.  Plastic bags were viewed as an environmental salve to the paper bag shortages and environmental logging concerns that filled the Mid-1970s to Early 1980s.  For thirty years, demand soared as plastic bags offered consumers a “one and done” product usability.  With plastic bags having a marginal cost to retailers and a perceived zero cost to the consumer the product proliferation without market restraint led to a Tragedy of the Commons.  As plastic bag use spread globally their negative externalities began to emerge; reports of littering, lack of biodegradability in landfills, ocean contamination and other environmental pollutants began to crop up.  An intended utilitarian good quickly turned into a non-disposable consumer good.

At first, there were attempts to create a market in property rights to control the impact of plastic bags on the environment; retailers created recycling programs to take back the bags and some even had a deposit refund associated with their return, but the reform didn’t take.  Consumers just don’t recycle their plastic bags.  Without the market of plastic bag recycling, plastic bags became a common good that was over-exploited by the consumer and the supplier without proper disposal. Plastic bags became a market failure.  The EPA states that today the United States alone currently uses around 380 billion plastic bags annually; less than 10% of these bags get recycled.  Vincent Cobb, President of reusablebags.com described the plight of plastic bags , “[They] are a brilliant product but they are a victim of their own success.  They’ve been perceived as free when they have a real cost to the environment and to consumers.”  

Until the start of the 21^st century, the social cost was hidden and economic cost was thought to be null, that is until the San Francisco Department of the Environment (SFDOE) put a price on the cost to “cleanup the commons."  In 2004, the SFDOE released a study of estimated costs for clean up and landfill processing of plastic bags at 17 cents for each bag. For San Francisco, this adds up to $8.5 million in costs to clean up the over 100,000 plastic bags found annually in the waste stream.  To correct the negative externalities caused by plastic bags, governments had two options: command and control regulation (bans) and direct price intervention (fees and taxes).  In 2002, Ireland, by way of environmental taxation, and Bangladesh, via a regulatory ban, were the first nations to introduce government policy on plastic bags. Today over 140 cities, states, and nations have implemented a form of plastic bag reduction policy.  

With a reduced demand for plastic bags, suppliers followed the trappings of “see a need, fill a need” product development.  Reusable bags were quickly championed as the new right way to transport our harvest.  The benefits over plastic bags were quickly apparent; they reduced litter, were cost-effective and, used continuously, - are environmentally effective.  The number of reusable bag imports to the U.S. rose from 100 million in 2000 to half a billion in 2010.  With over 3.3 billion bags imported to date and the U.S population at just over 311 million, we have already exceeded “a few per person” utilization. 

Plastic bags were a market failure because they couldn’t satisfy any of the three R’s: reduce, reuse, and recycle. Where plastic bags failed at recycling, reusable bags must triumph at their intended design.  There is a potential Catch-22 that may ensue around reusable bags if they aren’t able to transcend the same market failure mechanisms that plagued the plastic bag.  As consumers purchase numerous reusable bags and/or collect free ones from retailers, the bag inventory in-house starts to accumulate.   It remains to be seen if consumer behavior around bag reuse will adapt fast enough to impose market control on the scale of reusable bags.  Should the stockpile of reusable bags begin to seep out of kitchen cupboards and car trunks and into our landfills and roadsides, it is possible that a repeat offense of negative externalities will be seen in this new generation of carrier bags.

Image credit: Anna Shvets/Pexels