Practice Exam Questions
Micro and Macro Impact of a Plastic Tax (Revision Essay Plan)
Last updated 2 Jun 2018
Here is a short video looking at how to shape a synoptic revision essay on the title: "Evaluate the possible microeconomic and macroeconomic impact of a government taxing all producers of plastic packaging including plastic bottles and food containers."
Micro point 1
One micro effect of a tax on plastic packaging is that it will increase the private costs of producers and encourage them to innovate to find ways of reducing the amount of plastic used in products and also provide better facilities for consumers who want to recycle used items.
Plastic packaging creates negative externalities both from production and consumption. Only 0.25% of coffee cups in the UK for example are recycled. There is a case for a tax on producers so that some of the external costs are internalized. Unless businesses such as Coca Cola and Pepsi find ways of cutting plastic content, their costs will rise and profits may fall. This might then lead to a fall in their share price affecting returns for stakeholders including owners and employees. One option is for producers to pass on some of all of a tax on plastic to customers.
Although in theory a tax on plastic packaging will help correct for market failure, in practice, many consumers have a strong default bias towards single-use plastic bottles and plastic cups and even if the extra cost is passed on to them, it might only be a small percentage of their total spending. As a result demand for plastic products might be price inelastic (PED<1) which means that the tax might be ineffective. An alternative might be to encourage retailers to expand a bottle deposit scheme or extra funding for free public water fountains.
Micro point 2
A second micro impact of a tax on plastic packaging would be that the real incomes of consumers would fall and this might have most effect on lower income.
A tax on suppliers causes an inward shift of the supply curve which, other factors remaining constant, will lead to an increase in retail prices for products such as energy drinks, coffee and takeaway processed meals. When prices rise, the real incomes of consumers fall and the effect might be greatest on larger families on moderate incomes who often rely on pre-packaged foods which use a lot of plastic packaging. This might mean that a tax on plastic would have a regressive effect on the overall distribution of income leading to a rise in inequality.
Although there is a risk of a tax having a regressive effect, much depends on whether households change their behaviour. The plastic bag tax is widely seen as a success and has led to a big reduction in the number of bags handed out in supermarkets. The extra revenue raised by a new tax could also be hypothecated towards more funding for projects such as early years education, free school meals and subsidised transport for families which might have a progressive effect on families.
Macro point 1
One macroeconomic effect of a tax on plastic packaging is that it would lead to an increase in the rate of inflation and therefore potentially a significant increase in the cost of living.
The tax would affect many industries in the UK including drinks & food manufacturers and other suppliers such as magazines and coffee shops. If their variable costs of production rise, producers will pass on higher costs through the supply chain to final consumers and this will lead to an increase in cost-push inflation. This is shown in my diagram by an inward shift of the short-run aggregate supply curve. A higher cost of living lowers real incomes and might lead to a surge in wage demands in the UK labour market.
The impact of a tax on the rate of inflation depends on the significance of plastic in supply costs. In many industries, labour and energy costs are more important, so the effect on inflation might be limited. In addition, firms affected will have an incentive to reformulate their packaging to cut the amount of plastic. Indeed in the long run, investment in product design and alternative materials might lead to lower unit costs and prices throughout many industries.
Final reasoned comment
Plastic pollution poses significant long-term risks for millions of people and the natural environment. There is a case on grounds of market failure for a tax based on the polluter-pays principle. I favour a sliding-scale tax on plastic with packaging the hardest to recycle being charged the most and that revenues should be ring-fenced to fund local authorities to provide free water fountains in many more public places. A law that plastic bottles have to contain a minimum of 50% recycled plastic might also stimulate innovation in the long-run.
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