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Many cities have experienced a substantial decrease in the amount of garbage being collected after they changed from levying a tax on each household to pay for the pickup to charging a fee for each bag or can picked up. Would this have been the result of a change in Demand? If so, why; if not, why not? If not, what was the probable reason?
Garbage imposes negative externalities on society. As a result, there will be a divergence between the marginal private cost of producing garbage and marginal social cost of producing garbage with the latter being greater than the former at all levels. Each individual chooses the optimal level of garbage by setting his marginal benefit equal to his marginal private cost. As a result the private optimum will be greater than the social optimum. Hence there will be more garbage generated than it is socially optimal. The…

tax increases the marginal private cost and aligns it closer to the marginal social cost and therefore we will find a reduction in garbage generated. The amount of garbage generated reduces not because of decreasing demand but due to increasing marginal private costs which induces individuals to consider the externality they impose on the society.



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