Waste Management: Optimal Disposal Fee and Intergenerational Use of the Landfill

Abstract

The amount of solid waste increases with economic growth, which results in decreasing the remaining capacity of landfills. Because landfill space is not unlimited and the construction of new sites is often difficult due to the “not in my backyard” (NIMBY) syndrome and various constraints, an overabundance of waste produced by the current generation causes a shortage of landfills for future generations. In this chapter, we consider the optimal intergenerational use of landfills and optimal disposal fee policy that maximizes the sum of the social surpluses of those generations.

The amount of solid waste increases with the economic growth and decreases the remaining capacity of the landfill. The landfill is considered as the NIMBY (not in my backyard) facility, which is not easy to construct. If the waste generation of the present generation is excessive, future generations will not be able to use the sufficient landfill. Therefore, it is important to consider the optimal use of landfill sites between current and future generations to maximize the sum of the social surpluses of those generations.

The disposal fees on waste generators are expected to reduce solid waste generation. In this chapter, we will examine how effective the disposal fees on waste generators are in reducing the optimal level of generation to maximize the sum of the social surpluses of current and future generations. For this purpose, we will compare outcomes under three different policies: (1) no disposal fee is imposed on generators, (2) a flat fee is imposed, and (3) a fee per unit of waste emissions (i.e. unit-pricing) is imposed and examine the optimal policy condition to achieve the optimal waste generation (i.e. optimal use of the landfill) of the current and future generations.

1 Economic Analysis of Waste Disposal Charges

To simplify our analysis, this section will focus on solid waste that is produced and disposed of by the current generation. Waste management practices from an intergenerational perspective will be discussed in the next section where we consider optimal pricing schemes for both the current and future generations.

1.1 The Model Setup

Figure 5.1 illustrates the demand of waste generators (i.e., households) for disposal services (D) and the marginal cost of disposal to the municipality (MC). In the figure, the horizontal axis represents the amount of waste and the vertical axis represents the disposal fee per unit of waste charged to households (as well as the marginal cost of disposal service to the municipality, i.e., the incremental cost to the municipality of disposing of one additional unit of waste). Because households receive the services in accordance with the amount of waste they generate, the demand is expressed in terms of the amount of waste that households want to generate. The demand curve slopes downward to the right, reflecting that as the disposal fee becomes higher, households will generate less waste by putting more effort into waste management practices (e.g., avoiding disposable products and refusing packaging). It should be also noted that as the demand curve represents the marginal utility (cf. Chap. 1), the demand curve for disposal services corresponds to the households’ marginal utility from generating waste (i.e., the incremental utility from generating one additional unit of waste).

Fig. 5.1

Waste disposal and disposal fees

1.2 Optimal Amount of Waste

Households generate and dispose of waste as a result of consuming goods, so their utility from generating waste corresponds to their utility from consuming goods. Meanwhile, as they dispose of waste, there will be a cost incurred to society as a whole, which is, the cost of waste disposal. Therefore, the social surplus from generating waste is equal to the utility of households from generating waste minus the cost of waste disposal.

The question that we now address is the socially optimal amount of waste, that is, the amount of waste that maximizes the social surplus. It can be shown that at the optimal amount, the marginal utility of households from generating waste must be equal to the marginal cost of waste disposal.

To see this reason, we first consider the amount of waste of X₁ in Fig. 5.1 as an example, where the marginal utility from generating waste (FX₁) is larger by FG than the marginal cost of waste disposal (GX₁). At this level of waste, if an additional unit is generated, the resulting incremental utility (FX₁) exceeds the resulting incremental cost (GX₁) by FG. Hence, X₁ is not an optimal amount of waste, as generating an additional unit of waste would result in an increase in social surplus (by FG). This case corresponds to consumption being curtailed excessively to reduce the amount of waste.

We next consider the amount of waste of X₂, where the marginal utility from generating waste (IX₂) is smaller by HI than the marginal cost of waste disposal (HX₂). This level of waste is not socially optimal, either; if waste is reduced by one unit, the utility from generating waste declines by IX₂, but at the same time, the disposal cost declines by a greater amount, HX₂, resulting in an increase in social surplus by HI. In general, as long as the marginal utility from generating waste is larger (smaller) than the marginal cost of waste disposal, the social surplus could be improved by increasing (decreasing) waste generation.

The social surplus is maximized when the amount of waste is X*, where the marginal utility from generating waste is equal to the marginal cost of disposal. The social surplus is expressed in the figure as:

$$ \left( {{\text{Social surplus}}} \right){\text{ }} = {\text{ area AOX}}^{*} {\text{C }}{-}~{\text{area OBCX}}^{*} {\text{ }} = {\text{ area ABC}} $$

(5.1)

where area AOX*C expresses the utility of the households and area OBCX* corresponds to the disposal cost.

1.3 No Charges on Waste Disposal

Understanding the optimal amount of waste, we now examine how social surplus varies across the three policy options. We first consider a case in which there is no waste disposal fee (P = 0) and the disposal cost is covered by taxes such as resident taxes. When P = 0, the households generate waste in the amount of X₀. The benefit of the households, which is the utility from generating waste minus payment of the disposal fee, is represented by area AOX₀ – 0 = area AOX₀.

We assume that the disposal cost is financed by revenue from resident taxes. Then, taxes from the residents are equal to the disposal cost, represented as area OBEX₀. The balance of the municipality's revenue and expenditure on waste management is the tax revenue minus the disposal cost, which is area OBEX₀ – area OBEX₀ = 0. The social surplus from generating waste is the benefit of the households minus the resident taxes plus the balance of surplus payments in the municipality. The balance of surplus payments is considered part of the social surplus because all surpluses will ultimately benefit the residents by being used to finance public services or as a source of tax relief in the municipality. By assumption, the municipality has a zero surplus and therefore we obtain:

$$ \begin{aligned} \left( {\text{Social surplus}} \right) \, & = \, \left( {\text{Household benefits}} \right) \, {-} \, \left( {\text{Resident tax burden}} \right) \, \\ & \quad + \, \left( {\text{Municipal surplus}} \right) \\ & = {\text{ area ABC }}{-}{\text{ area CEX}}_{0} \\ \end{aligned} $$

(5.2)

By comparing Eqs. (5.1) and (5.2), we can see that the social surplus is smaller by area CEX₀ when the fee is not charged than when the optimal amount of waste is generated. This occurs because when disposal is free of charge, the amount of waste X₀ exceeds the optimal level X*, where the marginal cost of disposal exceeds the marginal utility from waste generation.

1.4 A Flat Fee Pricing Scheme

Now let us consider the social surplus in the case of a flat fee pricing scheme where the municipality charges residents a fixed fee for disposal services (e.g., charging $100 annually on each household) to cover the entire cost of the services. Since the fee is the same regardless of the amount of waste generated, the fee burden will not vary across households, so there is no incentive for them to reduce waste. Therefore, the amount of waste generated is X₀, which is the same as in the case of no waste disposal fee. In this case, the disposal cost is area OBEX₀, so the municipality sets a fixed fee equal to area OBEX₀. Then, the households’ benefit that includes the fee is the utility from waste generation minus the fee payment, which is expressed as area ABC minus area CEX₀. The municipality's balance of payments is zero, as the fee income equals the disposal cost. Again, we can calculate the social surplus by adding the household benefit and the municipal balance surpluses and therefore:

$$ \left( {\text{Social surplus}} \right) \, = {\text{ area ABC }}{-}{\text{ area CEX}}_{0} $$

We can see that this social surplus is the same as that obtained by Eq. (5.2); in other words, the social surplus is the same between when no fee is charged and when a flat fee is charged. In both cases, the amount of waste exceeds the optimal level (X*), and the social surplus is smaller by area CEX₀.

1.5 A Unit Pricing Scheme

Finally, let's consider a unit pricing scheme, also known as a “pay-as-you-throw (PAYT) program.” This type of instrument charges households a disposal fee in proportion to the amount of waste that they generate. A common approach currently adopted in many municipalities in Japan is that households purchase designated trash bags in advance sold by the municipalities and use the prepaid bags in each collection period.

In the figure, the social surplus is greatest when the amount of waste is X^* and thus, the optimal unit price is P^*. The total amount that the households pay for waste disposal is the fee × the amount of waste (i.e., P^* × X^* = area OP^*CX^*), so the household benefit (which is, once again, the household utility from generating waste minus the fee payment) is area AP^*C. The fee revenue of the municipality, which is equal to the payment by the households, is area OP^*CX^*, and the disposal cost is area OBCX^*. Therefore, the balance of surplus payments in the municipality concerning the disposal services is:

$$ \left( {\text{Balance of surplus}} \right) \, = \, \left( {\text{Fee revenue}} \right) \, {-} \, \left( {\text{Disposal cost}} \right) \, = {\text{ area BP}}^{*} {\text{C}} $$

(5.3)

and there is a surplus in the balance of payments. We can see that if the fee is set at a level equal to the marginal cost of waste disposal, the amount of waste can be controlled to an optimal level and the social surplus can be maximized (area AP*C + area BP*C = area ABC).

1.6 No Charge, a Flat Fee, or a Unit Pricing?

Let us compare and summarize the outcomes of implementing the three schemes (i.e., no charge, a flat fee, and unit pricing for disposal services) and discuss some policy implications for waste management practices. We first show that when there is no charge for waste disposal, there is no incentive for waste generators (or households) to reduce waste, resulting in excessive waste generation. Because the disposal cost is borne by the households in the form of resident taxes, their burden increases as they generate excess waste, and therefore, the social surplus decreases. A flat fee pricing scheme does not maximize the social surplus either; the burden on households is the same regardless of the amount of waste that they generate and thus, the households are not incentivized to reduce waste.

The social surplus can be maximized by implementing a unit pricing scheme in which the fee is set at the level where the marginal utility (i.e., the demand curve) of waste generation equals the marginal cost of waste disposal. If the fee is set that way, the municipality will receive the fee revenue that exceeds the disposal cost, resulting in a surplus in the balance of payments as shown in Eq. (5.3). Because the households bear costs larger than the actual cost of disposal, objections may arise. However, from the point of view of maximizing social surplus, a surplus in itself is not a problem since it will ultimately be given back to the households in the form of funding for public services and tax breaks.

If the municipality lowers the fee to eliminate its surplus and to cover the cost exactly, the social surplus will not be maximized. Because waste disposal becomes more than the optimal level. Instead of lowering the fee, the municipality should refund the surplus to the households by reducing resident taxes for example.

2 Optimal Intergenerational Use of Landfills and Optimal Fee Policy

In the previous section, we examined whether a unit-pricing scheme for waste disposal would be effective in reducing waste. In the analysis, we focused on the current generation (i.e., those who currently live) without taking into account the existence of future generations (i.e., those who will live after the current generation). This section will extend the analysis to include an intergenerational perspective. When considering not only the current generation but also future generations, we should take into account the fact that landfills may not be unlimited. For countries with small land areas (e.g., Japan), in particular, landfills themselves are “precious resources” because it is often difficult to increase them due to various constraints on the construction. Given the shortage of landfills, it is necessary to consider how the final landfills should be utilized by the current and future generations and what kind of policies and practices should be implemented to achieve the desired outcome.

Below, we first explain the model for analysis. For simplicity, we will assume that there are only two generations: the current and future generations. Furthermore, to focus on the issue of landfills, we will not address environmental pollution caused by waste disposal. The analysis will demonstrate that the current waste policy is likely to lead to an overabundance of waste produced by the current generation, resulting in a shortage of landfills available for the future generation. We will also consider the pricing scheme that would lead to the optimal use of final landfills by the current and future generations.

2.1 The Model Setup

The discharged waste is reduced in volume through intermediate treatment such as incineration, and then disposed of at final landfills. If a certain fraction of the discharged waste is dumped in the final landfills, then the maximum amount of waste that can be discharged by both generations is determined by the capacity of the final landfill sites. This amount is hereafter called the amount of waste dischargeable. In this model, it is assumed that the capacity will not increase over time; in other words, new final landfill sites will not be built in the future so that the same sites are and will be used by the current and future generations, respectively. It is further assumed that the sites will be used up by both generations. In this setting, the sum of the total volume of waste generated by the current and future generations is equal to the amount of waste dischargeable.

Figure 5.2 illustrates the utilization of the final landfills between the two generations where the amount of waste dischargeable is X̄. In the figure, the two vertical axes represent the disposal fees per unit of waste, and the D_c (D_f) represents the demand curve for disposal services by the current (future) generation of households. As in the previous analysis, we express the demand for disposal services in terms of the amount of waste generated. D_c (D_f) takes O_c (O_f) as the origin and measures the current (future) generation's waste on the horizontal axis to the right (left). For example, when the disposal fee is P₀, the amount of waste generated by the current (future) generation is O_cX₀ (O_fX₁). The demand curves are depicted as downward sloping in that waste generation decreases as the disposal fee increases. This implies that as the fee increases, households will make more efforts to produce less waste. MC₀ represents the marginal cost of waste disposal, i.e., the incremental cost incurred when an additional unit of waste is collected, incinerated, and finally dumped into the final landfills. Assume for simplicity that the marginal cost is constant and that the marginal cost is the same across the generations.

Fig. 5.2

Allocation of the final landfills between the two generations

2.2 Benefits for the Current and Future Generations When no Fee is Imposed

Using Fig. 5.2, we consider the amount of waste generated by each generation and the resultant social surpluses when no disposal fee is imposed on households. We first examine the current generation. Since the price of the disposal services is zero, households of the current generation produce waste in the amount of O_cX₃ and thereby obtain the utility expressed by area AO_cX₃. The benefit of the households from waste generation, which is the utility minus the fee payment, is also expressed by area AO_cX₃ due to the zero price of disposal services. On the other hand, the cost of disposal services to the municipality is expressed by area HO_cX₃E. We assume that the disposal services are just financed by the resident tax; in other words, the disposal cost (area HO_cX₃E) is equal to the resident tax paid by the households. Given that the households pay for the disposal cost through resident tax, the overall benefit of the households is obtained as the benefit from waste generation minus resident taxes, which is expressed as area AO_cX₃ – area HO_cX₃E or area AHC – area CX₃E. The municipality's surplus on waste management (i.e., resident taxes – the disposal costs) is zero by assumption. Therefore, the social surplus, defined as the sum of the overall household benefit and the municipality's surplus, is expressed as

$$ \begin{aligned} \left( {\text{Social surplus of the current generation}} \right) \, & = {\text{ area AHC}}{-}{\text{area CX}}_{{3}} {\text{E }} + \, 0 \\ & = {\text{ area AHC}}{-}{\text{area CX}}_{{3}} {\text{E}} \\ \end{aligned} $$

Now let us turn to the future generation. Given the price of the services being zero, households of the future generation want to generate waste in the amount of O_fX₄. However, because the amount of waste dischargeable is constrained to be X̄ and also because the amount disposed of by the current generation is O_cX₃, the future generation will only be able to generate waste in the amount of O_fX₃. The future generation's utility from generating the waste is represented as O_fX₃FG, which also exhibits the benefit of the households in the future generation from waste generation due to the zero price of disposal services. The municipal cost of the services is expressed as area O_fX₃EI, which is assumed to be equal to the amount of the resident tax burden. Therefore, the overall benefit of the households in the future generation (i.e., the benefit from waste disposal minus resident taxes) is expressed as area GFEI (area O_fX₃FG minus area O_fX₃EI). The municipality's surplus (i.e., resident taxes minus the disposal costs) is zero by assumption. It then follows that the social surplus of the future generation is obtained as:

$$ \left( {\text{Social surplus of the future generation}} \right) \, = {\text{ area GFEI }} + \, 0 \, = {\text{ area GFEI}} $$

After examining both generations, we can now derive the total social surpluses of all generations by combining the social surplus of the current generation with that of the future generation. For simplicity, we assume that the discount rate¹ is zero (in other words, current benefits and future benefits are valued equally). Then, the total social surpluses of all generations are simply the sum of the social surplus of the two generations, which is expressed as follows:

$$ \begin{aligned} \left( {\text{Total social surpluses of the two generations}} \right) \, & = {\text{ area AHC }} + {\text{ area GFEI}} \\ & \quad {-}{\text{area CX}}_{{3}} {\text{E}} \\ \end{aligned} $$

(5.4)

2.3 Marginal Social Surplus

Here, we consider the incremental change in social surplus of the current (future) generation that would occur when the current (future) generation produces an additional unit of waste. This change will hereafter be referred to as “the marginal social surplus of the current (future) generation,” thus playing an important role in the assessment of whether a particular combination of waste levels by the current and future generation is socially optimal.

As explained earlier, the social surplus is the sum of households’ overall benefit (i.e., household utility minus resident taxes) and the municipality's surplus (i.e., resident tax revenues minus disposal cost). Assuming that the tax payment is equal to the tax revenue, the social surplus of the current generation is given as:

$$ \begin{aligned} & \left( {\text{Social surplus of the current generation}} \right) \, = \, \left( {\text{Household utility of the current generation}} \right) \\ & {-}\left( {\text{Waste disposal cost of the current generation}} \right) \\ \end{aligned} $$

(5.5)

An additional unit of waste generation influences not only the households’ utility but also the disposal cost, ultimately changing the social surplus of the current generation. Therefore, Eq. (5.6), which is obtained from Eq. (5.5), implies that the change in the social surplus is equal to the change in utility minus the change in the disposal cost:

$$ \begin{aligned} & \left( {\text{Change in the social surplus of the current generation}} \right) \, = \, ({\text{Change in the current generation}}^{\prime}{\text{s}} \\ & \quad {\text{household utility}}) \, {-} \, \left( {{\text{Change in the current generation}}^{\prime}{\text{s waste disposal cost}}} \right) \\ \end{aligned} $$

(5.6)

Given that we are considering an additional unit of waste generated, the left-hand side is “the marginal social surplus of the current generation,”² the first term of the right-hand side corresponds to the marginal utility (i.e., the incremental utility from generating an extra unit of waste), and the second term corresponds to the marginal cost of waste disposal (i.e., the incremental cost incurred when disposing of an extra unit of waste). Then Eq. (5.6) can be rewritten as

$$ \begin{aligned} & \left( {\text{Marginal social surplus of the current generation}} \right) \, = \, \left( {{\text{Marginal utility of the current generation}}^{\prime}{\text{s households}}} \right) \, \\ & \quad {-} \, \left( {\text{Marginal cost of waste disposal of the current generation}} \right) \\ \end{aligned} $$

Likewise, for the future generation, we obtain the following equation:

$$ \begin{aligned} & \left( {\text{Marginal social surplus of the future generation}} \right) \, = \, \left( {{\text{Marginal utility of the future generation}}^{\prime}{\text{s households}}} \right) \\ & \quad {-}\left( {\text{Marginal cost of disposal of the future generation}} \right) \\ \end{aligned} $$

2.4 Do “No Disposal Fees” Maximize the Total Social Surplus of All Generations?

Turning back to Fig. 5.2, we examine the marginal social surplus of the current and future generations when the current and future generations generate waste in the amount of O_cX₃ and O_fX₃, respectively. We will first consider the current generation. As is evident from the figure, the marginal utility is zero (recall that the demand curve represents the marginal utility curve), and the marginal cost of waste disposal is EX₃. Therefore, the marginal social surplus of the current generation is negative EX₃ (= 0 − EX₃). This means that an additional unit of waste generation will lower the social surplus by EX₃, because it does not change their utility (i.e., the marginal utility is zero), while increasing the disposal cost by EX₃. This result can also be interpreted as indicating that if the current generation reduces waste generation by one unit, the current generation's utility does not change, but the disposal cost decreases by EX₃, so that the social surplus of the current generation increases by EX₃.

We next examine the future generation. When the amount of waste generated by the future generation is O_fX₃, their marginal utility is FX₃, their marginal cost of disposal is EX₃, and therefore their marginal social surplus is FE (= FX₃ − EX₃). In other words, by increasing their waste generation by one unit, the disposal cost increases by EX₃, but their utility also increases by FX₃, so that their social surplus increases by FE. Combining these results, we can conclude that if O_cX₃ and O_fX₃ are the amount of waste generated by the current and future generations, respectively, the social surplus of the current and future generations would increase by EX₃ and FE, respectively, by reducing the current generation's waste by one unit and increasing the future generation's waste by that amount. These changes would lead to an increase in the total social surpluses of all generations by FX₃ while the total amount of waste generated by both generations remains the same. This result indicates that when a disposal fee is not charged, waste generated by the current generation will be excessive while waste by the future generation will be insufficient; the social surpluses of all generations cannot be maximized. To increase the total social surpluses of both generations, it is necessary to reduce the amount of waste by the current generation and increase the amount of waste by the future generation.

2.5 Conditions for Optimal Landfill Use Between the Generations

To what extent should the current generation reduce their waste and should the future generation increase their waste to maximize the total social surpluses? Let us first consider whether the total social surpluses of both generations are maximized when the current and future generations produce waste in the amount of O_cX₀ and O_fX₀, respectively. The marginal social surplus of the current generation is LM, which is the marginal utility (LX₀) minus the marginal disposal cost (MX₀). Likewise, for the future generation, the marginal social surplus is NM (= NX₀ − MX₀). Here, both marginal benefits are positive, and the marginal social surplus of the current generation exceeds that of the future generation (by LN). This condition implies that the total social surpluses of both generations are not maximized at this particular combination of waste levels (under the constraint that the amount of waste dischargeable is X̄).

To see this, recall that (positive) marginal social surplus indicates an incremental increase in the benefit of the generation from increasing their waste by one unit; it can also be interpreted as indicating an incremental decrease in the social surplus of the generation from decreasing their waste by one unit. Thus, when the marginal benefit of the current generation is larger than that of the future generation, the total social surpluses of both generations can be increased, while the total amount of waste generated by both generations remains the same. Specifically, if the current generation increases their waste by one unit and at the same time the future generation reduces their waste by that amount, the total social surpluses of both generations will be increased (with no change in the total disposal) because the increase in the social surplus of the current generation (LM) outweighs the decrease in social surplus of the future generation (−NM).

What if the marginal social surplus of the future generation exceeds that of the current generation? As an example, we examine the case where the current and future generations produce O_cX₁ and O_fX₁, respectively; here, the marginal social surplus of the current generation, TS (= TX₁ – SX₁) is smaller than that of the future generation, RS (= RX₁ – SX₁). If the current generation reduces waste by one unit and at the same time the future generation increases waste by that amount, the total social surpluses of all generations will be increased without a change in the total amount of waste generated by both generations. This would occur because the decrease in the social surplus of the current generation (−TS) is smaller in magnitude than the increase in the social surplus of the future generation (RS).

Overall, these analyses demonstrate that if the marginal social surplus of the current generation exceeds the marginal social surplus of the future generation, the total social surpluses of all generations would be increased by increasing the current generation's waste and decreasing the future generation's waste by that amount. In contrast, if the marginal social surplus of the future generation exceeds the marginal social surplus of the current generation, the total social surplus of all generations would be increased by reducing the current generation's waste and increasing the future generation's waste by that amount.

The total social surplus is greatest when the waste produced by the current and future generations are O_cX* and O_fX*, respectively, where the marginal social surplus of the current generation is equal to the marginal social surplus of the future generation. In general, the condition for maximizing the total social surpluses of both generations is that the wastes generated by the current and future generations are set at a level where the marginal social surplus of the current generation is equal to the marginal social surplus of the future generation. At these levels of waste, we obtain:

$$ \begin{aligned} & ({\text{Social surplus of the current generation }}({\text{i}}.{\text{e}}.,{\text{ its utility}}{-}{\text{its disposal cost}})){\text{ }} = \\ & \quad {\text{area O}}_{{\text{c}}} {\text{ABX}}^{*} {-}{\text{area O}}_{{\text{c}}} {\text{HKX}}^{*} {\text{ }} = {\text{ area AHKB}} \\ \end{aligned} $$

and

$$ \begin{aligned} & ({\text{Social surplus of the future generation }}({\text{i}}.{\text{e}}.,{\text{ its utility}}{-}{\text{its disposal cost}})) \\ & \quad = {\text{ area O}}_{{\text{f}}} {\text{GBX}}^{*}{-}{\text{area O}}_{{\text{f}}} {\text{IKX}}^{*} \, = {\text{ area GIKB}} \\ \end{aligned} $$

It then follows that:

$$ \begin{aligned} & ({\text{Total social surpluses }}({\text{i}}.{\text{e}}.,{\text{ social surplus of the current generation }} + {\text{ social surplus of the future}} \\ & \quad {\text{generation}})) \, = {\text{ area AHKB }} + {\text{ area GIKB}} \\ \end{aligned} $$

(5.7)

By comparing Eqs. (5.4) to (5.7), we can see that the total social surpluses of all generations decrease by area BX₃F when there is no disposal fee. The no-disposal-fee policy leads the current generation to produce an excessive amount of waste, thereby having the future generation produce an insufficient amount of waste.

2.6 Optimal Fees and Optimal Allocation of Waste Generation

As discussed in Section I, even if a fee is imposed, a flat fee pricing scheme would not maximize the social surplus; rather, a disposal fee per unit of waste would be necessary to keep the waste produced by the current generation at an optimal level. How should the municipality set the fee per unit?

As explained earlier, the condition for maximizing the social surplus is that at the amount of waste produced by the current and future generations, their marginal social surpluses equalize. In Fig. 5.2, we can see that the marginal social surpluses of the two generations equal at point B where their demand curves for disposal services intersect. Therefore, by setting the disposal fee at P*, the amount of their waste can be directed to a level that maximizes the total social surpluses of two generations; it is O_cX* for the current generation and thus, the future generation will be able to generate waste in the amount of O_fX*, which is the same as the amount of waste that they want to generate at the disposal fee of P*.

Now let us compare the results when the future generation is not taken into account (as in Section I) and when it is (as in the discussion above). In Section I, we found that the social surplus is maximized by setting the level of the fee per unit equal to the marginal cost of disposal. When the future generation is taken into account, the optimal disposal fee is P*, which exceeds the marginal cost of disposal (P₁).

To what extent does the total social surpluses decrease if we set the fee equal to the marginal cost (i.e., P₁)? At this fee level, the current generation produces O_cX₂ while the future generation wants to produce O_fX₅. However, given that the amount of waste dischargeable is X̄, the capacity left for the future generation is O_fX₂, which is smaller than O_fX₅. In other words, setting the fee at P₁ would result in having the current generation produce excessive waste and the future generation produce insufficient waste.

In this case, the household utility is area O_cACX₂ for the current generation and area O_fGJX₂ for the future generation, and the disposal fee is area O_cHCX₂ for the current generation and area O_fICX₂ for the future generation. Then the social surplus of the current generation is:

$$ \left( {\text{The utility of the current generation}} \right) \, {-} \, \left( {\text{The disposal cost}} \right) \, = {\text{ area AHC}} $$

Likewise, the social surplus of the future generation is:

$$ \left( {\text{The utility of the future generation}} \right) \, {-} \, \left( {\text{The disposal cost}} \right) \, = {\text{ area GJCI}} $$

Hence, the total social surpluses are:

$$ \begin{gathered} \left( {\text{Social surplus for the current generation}} \right) \, + \, \left( {\text{Social surplus for the future generation}} \right) \hfill \\ \quad = {\text{ area AHC }} + {\text{ area GJCI}} \hfill \\ \end{gathered} $$

As we can see from Eq. (5.5), setting the fee at P₁ results in smaller total social surpluses by area BCJ than setting it at P*.

2.7 Existence of the Future Generation and Optimal Waste Management Policies

Let us summarize some important points for the optimal waste management policy that takes into account the existence of the future generation. First, the optimal waste disposal fee that maximizes the total social surpluses of all generations must reflect not only the marginal cost of waste disposal but also the utility of the future generation (i.e., the marginal surplus of the future generations). Therefore, the fee should be charged in such a way that it is higher than the marginal disposal cost.

Second, given that the optimal waste disposal fee is higher than the marginal disposal cost, the revenue of the municipality from the fee exceeds the disposal cost and accordingly, the municipality in each generation will have a surplus in the balance of payments. Therefore, it is inappropriate for the municipality to reduce the disposal fee so that the surplus is zero, which means that the revenue from the disposal fee is equal to the total cost of waste treatment. The reason is that a disposal fee below the optimal level would result in an excess amount of waste by the current generation and an insufficient amount of waste by the future generation, which is not desirable from an intergenerational perspective.

Third and related to the previous point, if the waste disposal service becomes profitable by setting an optimal waste disposal fee, the surplus can be refunded to the residents. In such an instance, lowering the disposal fee may be the worse choice, as the undesirable consequences would occur as mentioned above. Other tax measures such as a reduction in the resident tax rate would be preferable.

Lastly, the social surplus would become smaller (larger) for the current (future) generation when the waste disposal fee is above the marginal disposal cost than when equal to the marginal cost. Upon raising the fee above the marginal disposal cost, the increase in the social surplus of the future generation outweighs the decrease in the social surplus of the current generation, and accordingly, the total social surpluses of both generations would increase. Therefore, the social surplus of the future generation should be increased at the expense of that of the current generation.

2.8 Potential of Market Approaches to Optimizing Intergenerational Allocation of Landfills

So far, we understand that the waste disposal fee must be set in such a way that the marginal social surplus of the current and future generations are equal; the fee level must correspond to the intersection of the current and future generations’ demand curves as shown in Fig. 5.2. To set a fee this way, municipalities need to know the current and future generations’ demand curves. However, it may be practically difficult, if not impossible, to accurately estimate the current generation's demand curve and/or the future generation's demand curve.

An alternative to optimizing waste disposal and maximizing total social surpluses across generations is market-based approaches where waste services are provided completely by private sectors instead of local government. In this approach, households and commercial establishments that generate solid waste sign contracts with private waste operators and pay them in exchange for the services. This approach has several advantages. First, the introduction of competition in waste management is expected to lower the disposal cost. Second and more importantly from an intergenerational perspective, it is expected that private waste operators provide the services by taking into account the demands of both the current and future generations. For example, if private waste operators predict the future demand for the services will be so large that they will be able to charge a higher fee for both generations, the operators will reduce waste services for the current generation and thereby leave more landfill capacity for future waste disposal. They would do so because that would be more profitable both at present and in the future.

More generally, as long as private waste operators pursue profit maximization, they will provide more waste services for the generation whose demand is relatively large, or equivalently, whose willingness to pay is relatively high to increase the sum of their profits from both current and future generations. As a result, private waste operators would unwittingly play a role in maximizing the total social surpluses of all generations. These arguments suggest that the introduction of a market mechanism into waste management will likely bring about desirable outcomes from an intergenerational perspective.

Third, unlike government organizations such as municipalities, private sectors can flexibly vary disposal fees. For example, fees will become high when the demand for waste disposal services increases due to an increase in waste, resulting from the booming economy. The fee increase would provide households/firms an incentive to reduce waste, preventing a decrease in the disposal capacity available for future generation. Changes in the fee level in response to demand may therefore help promote optimal use of landfills between the current and future generations.

Some might argue that we should not have private sectors provide waste services because it is difficult for them to accurately predict the demand of the future generation, and so their decisions can be wrong. Their wrong predictions may result in a misallocation of landfill capacity across generations. However, this possibility also applies to the case in which the local government provides the services; there is no guarantee that the government will be able to make better decisions than the private sector. Moreover, given that decision-making in government has often been influenced by political factors and pressure groups, desirable outcomes may be more likely obtained if all is left to the private sector.

It should be noted, however, that even if waste services are provided by private sectors, local government still needs to play key roles in waste management, such as curbing illegal dumping by increasing surveillance and penalties. The government should also implement measures to prevent environmental pollution at waste sites owned and managed by private sectors.

One may be skeptical about the market-based approach based on the idea that private sectors pursue their profit and consequently may disregard environmental protection. However, it is not necessarily the case that the environment will be adequately protected if waste is controlled by government or public sectors with no profit motive, as exemplified in the pollution problem at the landfill in Hinode-cho, Tokyo. Market forces may effectively prevent solid waste pollution and illegal dumping with the aid of measures that incentivize private sectors and waste generators to properly manage waste. The transfer of waste management from the government to the private sector may not be straightforward, given that various issues are involved, including landfill capacity, environmental risks, and illegal dumping of wastes. Nonetheless, it is worthwhile to consider the potential of the market mechanism to address problems associated with waste generation and disposal.

Box 5.1 Current Waste Situation in Japan

Under the Waste Management and Public Cleansing Act, waste is classified into two types: industrial and municipal solid waste. Industrial waste refers to waste generated by business activities. Twenty types of waste sources are defined by the Act as industrial wastes: ash, sludge, waste oil, waste acid and alkali, waste plastics, rubber and metal, waste glass, slag, debris, and dust. Municipal solid waste (MSW) refers to refuse and night soil, and waste other than industrial waste as defined by the Act. Among these two, wastes that are explosive, toxic, infectious, or harmful to human health and the living environment are specified as specially controlled industrial waste or specially controlled MSW, and must be kept under strict control throughout the process of collection, transportation, and disposal.

Waste disposal responsibilities were also defined in the Act. The disposal of industrial waste is the responsibility of the generators. They dispose their waste either by themselves or by commissioning a third-party contractor authorized by the local government. The disposal of MSW is the responsibility of municipalities and they dispose their waste similarly as generators of industrial waste do.

Figure 5.3 shows the changes in the total waste discharge and per capita waste generation per day in Japan. As shown in the figure, the total waste discharge peaked in FY2000 (54.83 million tons) and began to decline afterwards, with the amount at the end of FY2020 reduced by 24% from the peak to 41.67 million tons. Among the total waste generated in the country, 8.33 million tons were recycled, 29.76 million tons were reduced through intermediate treatment, and 3.64 million tons were for final disposal. This decrease resulted in a lower final disposal, which increased the remaining life expectancy of landfills (i.e., the number of years of remaining capacity) from 12.8 years on average nationwide at the end of FY2000 to about 22.4 years at the end of FY2020.

Fig. 5.3

Source Ministry of the Environment (2022) “White Paper on Environment, Recycle Oriented Society and Biodiversity”, https://www.env.go.jp/policy/hakusyo/r03/pdf/2_3.pdf (in Japanese) (last access date/ 2/23/2024)

Total waste discharge and per-capita waste generation per day in Japan.

Figure 5.4 shows changes in the nation’s industrial waste generation. The amount peaked in FY1996 (426 million tons) and declined to 385.96 million tons in FY2019, down by 9.4% from the peak. Of the total discharge, 203.57 million tons were recycled and 173.23 million tons were reduced through intermediate treatment, leaving 9.16 million tons for final disposal. Consequently, the remaining life of landfills for industrial waste increased from 3.1 years in FY1996 to 16.8 years at the end of FY2019.

Fig. 5.4

Source: Ministry of the Environment (2022) “White Paper on Environment, Recycle Oriented Society and Biodiversity”, https://www.env.go.jp/policy/hakusyo/r03/pdf/2_3.pdf (in Japanese) (last access date/ 2/23/2024)

Industrial waste discharge in Japan.

Increased recycling contributed to the decrease in total waste generation. The amount of waste discharge has been continuously decreasing over the past 20 to 30 years owing to the introduction of recycling acts, disposal fees, and various other instruments. However, we must promote their sustainable use by establishing a sound material-cycle society as resources are finite. Enhancing recycling and waste reduction efforts will remain as important policy objectives.