IB Economics Article Commentary. Effects of the Ban of Plastic bags in California.

Environmentalists and some governors in California would agree that Plastic bags are cheap and effective when carrying small amount of goods but they consider the pollution it does is much larger to the society, thus the Social Cost (The Total cost of a transaction, the private cost plus the external costs) which is used to settle down the problem is bigger than the Private Cost (Cost that are born soley by the individuals involved in the transaction.) having a Negative Externality (When consumption of a good negatively effects a third party). To meet the Socially Optimal Equilibrium (Where the social cost of the last unit produced = social benefit.  This produces allocative efficiency.) the California Los Angeles County Board of supervisors approved preliminary ordinance that bands plastic bags at super markets. However, this Non-Marketing Solution (using non-market solutions, such as government rules, to solve an economic problem. Such solutions disregard the forces of supply and demand.) may be only creating a bigger problem around the society. By banning plastic bags it may be eliminating thousands of manufacturing jobs in California and also dismantle existing plastic bag recycling programs. This would be a Government Failure (the public sector analogy to market failure that occurs when a government intervention causes a more inefficient allocation of goods and resources than would occur without that intervention.), so the Governors should find another way to solve the problem than abolishing the jobs and moneys that were invested by the government in the recycling program. Furthermore it could create a black market for plastic bag. This situation can be represented in Production Possibility Curve.

The vertical axis is the price, and the horizontal axis is the quantity of plastic bags. California is trying to ban plastic bags. This creates another equilibrium shifting the market equilibrium left, moving e* to e^m black market. Banning causes huge social loss as shown on the graph. The price of plastic bag has also has risen highly from p* to p^m black market.

        California can choose to use Coarse Theorem (The problem of negative externalities will solve itself if property rights are clearly defined and people are allowed to negotiate.) to solve the problem. By choosing Coarse Theorem consumers will maximize utility and suppliers will be able maximize profits and there will be also no transaction costs between the suppliers and consumers. However firms may meet pollution objective with lower costs, causing more problem to occur in the environment. However, California can choose to tax their goods. It could have disadvantage, discouraging investment and production of plastic bags. Taxing the price of plastic bag will shift the market supply curve to social cost curve achieving the social optimal equilibrium. In short term government will be able to earn revenues as the rise of price due to tax will not be easily recognizable as the % of customer’s total budget will be minimal. However in long term people will slowly recognize the price and carry their own bags to save money. This will achieve the goal of saving the environment.