Packaging can shape a buying decision.

A Tax Incentive: Paper Bag Fees

by Elaine Schwartz    •    Mar 23, 2013    •    645 Views

I was just in a store that asked me for 10 cents when I requested a bag for my 2 bananas and an orange. Saying, “No thanks,” I stashed them in my purse. My next stop, a Walgreen’s again asked me for a dime. My answer was the same. With all of my purchases in my purse, I returned to my San Francisco hotel room.
No one told me to conserve. But a Pigovian tax achieved its goal.

Before explaining this tax incentive named after Arthur Pigou, I should point out that, in a recent court decision, a Los Angeles appeals court said the 10 cent charge was a fee and not a tax. Disagreeing, plastic bag makers claimed it was a special tax which would have meant it needed two-thirds local voter approval. The plastic bag people say that they will appeal the decision.

For me, though, the fee functioned just like a Pigovian tax. Pigovian taxes, named after British economist Arthur Pigou, shape our behavior and bring in revenue. Society benefits from Pigovian taxes because they diminish a cost that the market creates like more pollution.

When a Pigovian “tax” created the incentive for me to put the 2 bananas and the orange in my purse, I used fewer resources. Less demand for bags means resources will be used more productively elsewhere.

Sources and Resources: For the court decision, this SF Gate article has the details. For more on Pigovian taxes, I love the Pigou Club that Harvard professor Greg Mankiw has created. In this post, he lists the negative externalities and benefits that a gas tax (Pigovian) would impact:  the environment, road congestion, regulatory relief, the budget, tax incidence, economic growth, national security. And yet, thinking of the political opportunity cost, politicians do not go near a gasoline tax.

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