An Excise Tax on Municipal Solid Waste?

Under current policies in US states, the marginal cost to an individual household for disposal of another bag of garbage is essentially zero, even though collection and disposal costs increase with the amount of garbage. Instead, the social cost per bag of garbage should be the product's price plus the optimal tax rate. This chapter develops a theoretical model to characterize optimal waste taxes and tax-subsidy policies. It shows that an appropriately designed excise can achieve efficient levels of waste disposal and recycling, as well as raise revenue for state governments. The recommended approach would be a tax-subsidy or deposit-refund system, under which product sales would be taxed at retail stores and the recycling and legal garbage collection subsidized. It is shown that this Pigouvian type of environmental tax reform can match all the effects of having both the tax on garbage and the unavailable 'tax on dumping'. In addition, the empirical literature is reviewed on how unit pricing of solid waste affects disposal and recycling, whilst the welfare costs of illicit disposal are analysed.