I was walking home this evening and spotted two mattresses and a metal rack of some sort lying on the nature strip.  Looking at the mattresses in particular, I couldn’t help thinking that after all the rain, they were definitely not going to be of use to anybody and would likely end up in landfill.  Now, all the wood, metal and fabrics that were harvested, mined and spun before being manufactured into a bed would end up lying in a hole in the ground decomposing over hundreds or thousands of years.  “What a waste!”, was my immediate thought.  Then I got to thinking about extended producer responsibility (EPR) and whether or not it makes economic sense.  I haven’t done a comprehensive literature review, but I believe it makes sense for the following reasons:

  • It reduces negative externalities arising from landfill.
  • It increases resource use efficiency.
  • It fosters innovation.
  • It results in better products.

My reasoning is as follows.

Companies will by nature minimise the input costs to their business.  Companies will only care about the transaction of the product that directly relates to them and results in revenue.  That is, from manufacturer to consumer.  They aren’t incentivised to concern themselves with transactions outside of this except where doing so may result in a higher initial transaction value or ongoing brand value.  Take for example cars, they naturally lose value over time, but brands that are perceived to hold their value over time tend to also demand retail premiums.  So given this, very few companies will design, manufacture and price taking into account externalities unless they are forced to.  This is because there is no incentive for them to do so otherwise.

Carbon pricing is a clear example of this.

So, to really tackel problems with waste, pollution and design for obsolecsence, policy intervention is required.  While many people are opposed to government intervention in markets, where intervention leads to long term productivity gains, it is justified and in-fact, imperitive that governments take action.  In the case of externalities, the long term economic benefits area clear and include reduced waste, better quality products and better resource use efficiency.  So, policy intervention actually results in driving up the long run production possibilities curve for an economy, exactly what governments should be concerned with.

The other element to this is innovation.  Business, like life, works on a process of creation and destruction.  Value is created through new things, new production or even just new transactions (of old goods).  Innovation is by nature destructive, since it displaces existing technologies.  And what’s more, the benefits of innovation are usually realised by the second or third owner of the innovation.  This is why companies would resist change, because they are likely to spend the money innovating (by complying with regulation) but are not necessarily likely to benefit from the innovation.  In-fact, it could even send them broke.  It is for this reason that the lights will never go – as claimed by some fossil fuel dependent generators – out as a result of a carbon price.  All that will happen is that certain shareholders will lose their money as a company becomes goes bankrupt.  However, another group of owners will come in and purchase the assets, probably at a bargain price, and continue to manage the company.  This company would then potentially be more profitable as all costs are sunk and debts written off by the old entity.  Thus, creative destruction.  This is what happened with Great Southern Plantations in Australia.  I’m not saying people don’t lose out, because they do, and often it’s smaller investors who haven’t understood the risks of their investment.  However, in the long run, the economy benefits.

To conclude, government should really be responsible for picking losers, not winners.  And after all, the government is really just the biggest bully of them all, and bullies are excellent at picking on ‘losers’.

TK