The Plastic Bag Levy: Elasticity and Revenue Paradox
A state introduces a 15-cent charge on single-use plastic bags at supermarkets. Before the charge, supermarkets gave out 480 million bags a year at no explicit price. Twelve months later, distribution has fallen to 145 million bags, and supermarkets report a 9% rise in sales of reusable bags (priced $1.50) and a 4% rise in bin-liner sales (plastic bags sold in boxes). The government expected to raise about $40 million in revenue, which it planned to direct to a recycling fund. Actual revenue was $21.75 million. Supermarket representatives argue the charge is a 'tax on shopping' and that low-income households are hit hardest because they reuse fewer bags and buy more bin liners. Environmental groups counter that 335 million fewer bags entered the waste stream.
1. Calculate the price elasticity of demand for plastic bags implied by these figures, stating any assumptions, and explain why revenue fell short of the forecast.
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Assumption: treat the pre-charge price as effectively $0 and the new price as $0.15. A percentage change from zero is undefined, so use the quantity change and reason about elasticity via the midpoint method on quantity and the absolute price change.
Quantity change: (145 − 480) ÷ 480 = −69.8%. A near-70% fall for a 15-cent charge indicates highly elastic demand in quantity terms-consumers switched readily to reusables and bin liners.
Revenue: 145 million × $0.15 = $21.75 million, matching the data. The forecast of $40 million implicitly assumed roughly 267 million bags would still be sold-i.e. a fall of only about 44%. The actual fall was far larger.
Why revenue fell short: the government underestimated elasticity. Because the charge was highly visible and bags were easy to substitute (reusable bags, boxes of liners, carrying items loose), consumers responded strongly. Revenue = price × quantity; a large quantity fall outweighed the price rise. This is the classic elastic-demand revenue paradox: raising price from zero cuts revenue when demand is elastic.
Caveat: the 4% rise in bin-liner sales shows some substitution, not pure reduction-so the true fall in total plastic use is smaller than 335 million. The policy's environmental gain is partly offset by shifted consumption.
2. Evaluate the claim that the charge is regressive, and assess whether the recycling-fund shortfall undermines the policy's justification.
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Regressivity claim: a flat 15-cent charge is regressive in structure because it takes a larger share of a low-income household's budget. But the actual burden depends on behaviour: households that switch to reusables pay the charge only once. If low-income households reuse fewer bags (as claimed), they pay more per year-perhaps $15–$30-which is small in absolute terms but a higher proportion of income. The bin-liner substitution adds cost. So the claim has merit but the magnitude is modest, and the charge is avoidable, unlike a compulsory levy.
Counter-argument: the environmental benefit (335 million fewer bags) is a public good that benefits everyone, including low-income households in areas with waste problems. A charge that changes behaviour is more efficient than a ban, which removes choice entirely.
Does the shortfall undermine justification? No-revenue was a by-product, not the purpose. The policy's goal was reduced waste, and it succeeded on that metric. The shortfall actually signals success: people changed behaviour rather than paying the charge. Judging the policy by revenue confuses means with ends.
However, if the recycling fund was the intended mechanism for environmental improvement, the $18 million gap means less funding for that purpose-a real opportunity cost. The evaluation must separate the behavioural success from the fiscal shortfall and ask which objective the government actually prioritised. A well-reasoned answer recognises both and does not simply declare the policy a success or failure.