Unit pricing of household garbage in Melbourne: improving welfare, reducing garbage, or neither?

Charging for household garbage collection per unit of waste is becoming more popular. Discussions in the practical literature focus on unit pricing as a way to encourage diversion to recycling and reduction in waste, but the economics literature emphasizes welfare maximization through charging at the marginal social cost. In the present study unit pricing was examined from both perspectives through a case study on unit pricing by volume in Melbourne, Australia, using longitudinal data. The marginal social cost per unit weight was estimated using a custom costing model and a valuation of environmental externalities. This cost was applied to a derived regression equation for change in waste quantities with unit price. The results suggest a very weak link between marginal pricing and change in garbage quantities, with an arc elasticity of demand at the margin of -0.02. Small reductions in garbage may have been achieved by local governments that overtly used pricing systems to this end. Enforced reduction of standard bin sizes had much more impact on waste quantities and did not lead to any significant management or political problems.