A recent article in City Pages reported that Minneapolis City Council Member Cam Gordon is “redoubling his efforts on an old, thorny issue: getting Minneapolis to use fewer plastic and paper bags.” Specifically, Gordon proposes a 5-cent fee on plastic and paper grocery bags to encourage Minneapolis shoppers to bring their own bags or at least use fewer store-provided bags.
The piece went on to state that some critics believe “shoppers would clear out of Minneapolis and get their groceries in the suburbs, where they could double-bag everything without losing a dime.” Would urban shoppers really head to the suburbs for their comestibles?
When I first read this story, I thought that it would make a great problem for my introductory Economics course. The effects of the fee on the market for grocery bags depend on the size of the fee and the price elasticity of demand for grocery bags. Whoa! What does that mean? Let me explain these concepts so we can have a better discussion about the pros and cons of a Minneapolis grocery bag fee.
Externalities, bag fees, and the elasticity of demand
Externalities are activities that impose costs on or generate benefits for people not directly involved in those activities. That is, externalities are the side effects of producing and consuming goods.
Shoppers using single-use grocery bags can generate negative externalities through, for example, increased pollution and more paper in local waste streams. Producers do not factor these costs into their sales prices and thus offer their product at lower price than they otherwise would, and so grocers purchase more bags (and therefore supply more for their customers) than they would if the bags cost more.
One way to deal with this externality is to impose a compensatory tax on the market for single-use bags. This has two beneficial effects. First, the fee raises the price of a bag and thus reduces the number of them consumers will use, thereby reducing the negative side effects (like pollution). Second, the revenue collected can provide funds for garbage systems and for general clean up, again, to deal with the grocery bags.
An increase in the price of grocery bags will probably encourage people to use fewer of them. However, there are two ways this could happen. One way, envisioned by bag-fee proponents, is that customers will reduce their use of paper and plastic bags, perhaps by more efficiently packing their groceries or bringing their own grocery bags. The second way is to purchase fewer items in grocery stores where the fee is collected and more items where there is no fee.
How big will the second effect be? This depends on how sensitive a shopper’s spending is to the price of a grocery bag. That’s what economists call the price elasticity of demand. Thus, how many shoppers will flee Minneapolis for the suburbs will depend on how large the fee is and how sensitive they are to an increase in the price of a grocery bag.
Effects of bag fees
Empirical research on the price elasticity of demand for grocery bags indicates that shoppers are quite sensitive to a bag fee with reductions in bag usage between 60 and 90 percent in Ireland, Denmark, and South Africa. My hunch is that despite easy access to suburban grocers a Minneapolis bag fee would mostly reduce bag usage through the substitution of reusable bags for plastic and paper bags.
However, this ignores the fact that grocery bags have other uses. Rebecca L. Taylor, an economist at the University of Sydney, analyzed the effects of bag fees and bans in California from 2007 to 2015. Focusing on plastic bags, she found that these policies did reduce the number of plastic bags distributed by grocery stores. But, she also noted that “banning of plastic carryout bags leads to significant increases in the sale of trash bags, and in particular small and medium trash bags. When converted into pounds of plastic, 28.5% of the plastic reduction from DCB policies is lost due to consumption shifting towards unregulated plastic bags.” In other words, consumers are accustomed to using cheap, single-use bags for garbage and dog poop, and so if they don’t get them with their groceries, consumers will simply buy a box of plastic bags.
I didn’t put this problem on my students’ final exam. However, the Minneapolis City Council will need to study up and consider carefully all the effects of a bag fee before passing Councilman Gordon’s proposal.
Susan E. Riley contributed to this article.