## Sunday, August 14, 2011

I have previously argued (here, here and here) that cost effective recycling actually leads to an increase in the demand for the resource being recycled. This is the opposite of what most environmentalists, and even most economists, believe.

What I probably didn't explain is that not only can recycling increase the demand for the resource being recycled, but it can also increase demand for all other natural resources used in the economy. Yes, a new technology that makes recycling car tyres cheaper than manufacturing new car tyres would increase our demand for tyres (because they are cheaper) and for other resources, like oil. The reason is simple. Automotive transport just became slightly cheaper due to the recycling technology, and the response to this price reduction, however slight, is to increase the demand for automotive transport and all the other resources required to provide it.

This result usually seems counter intuitive at first. But we all accept that improving labour productivity does not decrease the demand for labour. And we all accept that improving agricultural productivity leads to an increase in land under cultivation, due to marginal lands becoming economically viable. So why not recycling? After all, if recycling is cost effective, isn't it also an example of improving the productivity of the material?

At the risk of being painfully repetitive (this is my fourth post on the matter), I will use the 'recycling of labour' as an example.

Suppose there is a task that takes two labourers a month to complete. Given the nature of the task, suitable labour can be found at $1000 per month per man. Now, a new technology allows us to 'recycle' the first mans labour at a cost of$500 per month. Given this is half the cost of employing a second man, recycling is an obvious profitable choice to get the work of two men achieved in a month with only one man. This new technology might comprise new equipment (power tools etc.), or simply the investment in teaching the man new skills.

In any case, one man is achieving two men’s' work for less cost. If I changed the terms a little it is clear how this is actually an example of 'labour recycling'. "Two bottles of cola can be provided with one bottle for less cost" would be a simple summary of the net effect of plastic bottle recycling.

But we know from centuries of experience that recycling labour increases demand for it. And we know that it leads to productivity gains elsewhere in the economy, since you can't improve economic productivity in isolation of the rest of the economy. As Len Brookes once elegantly noted, the 'principle of the indivisibility of economic productivity' means that any technology that improves the productivity (aka efficiency) of one resource, improves the productivity of ALL resources in the economy.

This post was partly inspired by one of Don Boudreaux's blog posts (originally published here). In it he describes recycling more broadly -
After I awaken, I shower and dry myself with a towel that I’ve had for a few years. I don’t discard it after one use. When it gets dirty, I rejuvenate it by processing it through recycling machines that my wife and I own: a washing machine and clothes dryer.
Then I brew coffee and fix breakfast. Each day, I use the same coffee maker that I used the day before. I clean it after each use, recycling it for the next brew. My wife and I drink the coffee from mugs that have been used many times in the past. (One set of our coffee mugs was handed down to us after my wife’s parents used them for several years.)
We also eat our breakfasts using dishes and utensils that are recycled from countless past uses. After breakfast, we recycle our mugs, dishes, and utensils with the help of another recycling machine: an automatic dishwasher.
After breakfast, I dress in clothes that I’ve worn before and that I will wear again. My underwear, my pants, my shirt, my necktie, my belt, my coat, my shoes – all are recycled from previous uses. Indeed, I take my suits and coats to a store specializing in recycling such garments: my local dry-cleaner.
And from a later post -
When materials are worth recycling, markets for their reuse naturally arise. For materials with no natural markets for their reuse, the benefits of recycling are less than its costs – and, therefore, government efforts to promote such recycling waste resources
His use of the term waste in the final sentence is misleading. He means that no consumers will gain from government efforts to promote costly recycling, therefore the resources utilised in recycling are wasted, as they could have been employed elsewhere to better satisfy consumers. However, from a macro viewpoint, it is this very cost-ineffective recycling that reduces economy wide productivity (aka efficiency) and resource demand.

That is the key lesson here. If an activity in uneconomic, it decreases our total level of economic activity and our total demand for resources. If it is economically justifiable, it increases our demand for natural resources. Indeed, if we are concerned about the externalities associated with using our natural resources we need to restrict the supply of these resources at the source - restrict sand mining locations, reduce allowable mining rights to coal etc. Trying to achieve these environmental outcomes by the most indirect route possible, through the consumer and far upstream production processes, is completely misguided.

1. Just because it's cheaper, does it always mean demand will rise?

What if recycling was coupled with a commensurate restriction/s in supply of natural resources (i.e. protection)?

2. Yes. There are very few cases where a lower price means demand falls (it's called a Giffen good when demand increases with price, and there is some evidence of that with staple foods in areas of poverty eg. http://blogs.wsj.com/informedreader/2007/07/16/economists-hunt-for-a-giffen-good-might-have-ended/)

Yes, restrictions on supply would work. They are the only actions that will work. In fact this could make recycling more cost effective - which is a good outcome for everyone (more goods produced) at the restricted level of supply.

If your reason for recycling is to avoid a material enetering land fill, than you either ban that material from land fill, making it a more costly material to use. Markets will find substitutes or come up with their own recycling programs. Or you fully price the externality of land fill - whether that means lining landfill sites will impermeable membranes/ concrete, sorting waste to chemically treat some materials etc.

My point is, address the problem at the source either by pricing in the externality, or by enacting quotas where that is not feasible.

3. So, to reduce deforestation (as an individual consumer) I should stop recycling and buying recycled paper?

It just doesn't sound right...

4. This comment has been removed by the author.

5. Actually, as an individual consumer your decision, and even the decision of a large group of consumers, does nothing to change the demand for wood pulp. What would work is to regulate to protect native forests, and allow planation forestry in suitable areas for timber and pulp. So just buy what gives you the best value.

There is a another problem that is rarely discussed. Residents of wealthy countries typically value enviromental amenity and the preservation of wilderness very highly. So we enact laws to protect these areas from logging, mining etc, yet the market reacts by seeking supplies in other countries with less stringent environmental protections.

Should those countries also protect their environment to the same extent? Or are they the happy beneficiaries of logging and mining businesses that would not have developed without first world environmental protection?

Once they become wealthier from these industires, will they too place high value on the environment and implement protection of remaining wilderness areas?

I don't know.

6. Ok so I'm thinking of recycling as paper, glass etc & our goal as less landfill & less resource extraction.

So is paper really that price elastic? Do we use more paper because it's cheaper? (that's not what I think at work when I hit print) don't we choose recycled paper not because it's cheaper but because we think it's better (I'm not sure if it is actually cheaper?)

So If our demand is relatively fixed? A higher proportion coming from recycled would mean less from forests????

7. Of course paper is price elastic. If it was $0.10 per sheet instead of$0.001 per sheet, you would definitely cut down in printing. Newspapers would be more expensive, books, the whole lot.

Demand is never relatively fixed - we will always find more uses if the price is cheaper than some alternative resource.

I addressed in one of my previous posts the landfill v resource extraction distinction.

8. Hmm there's got to be a whole In your logic somewhere ;)

So just because recycled paper is cheaper, why does that mean demand for expensive forest paper will also rise?

(wer're still assuming recycled is cheaper for paper - it may not be)

9. and then there is the issue of recycling other things such as water ... which does not make water demand higher but rather may act to reduce waste water disposal problems as well as get people to value the resource better.

Value is not only about money either. If you live in a cottage and get water from a well for free if you have a pump to pull it into your kitchen and a plumbed sink to take it "away" for you I know you'll use more water than if you pump it by hand from the well can cart it inside.

You will be using the water more economically in the case of investing more of your effort to get it.

This is a cycle of importance which is based on convenience which we attempt to pervert and then use some other dis-associated economics to justify.