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Series Editor: Joshua Linn
Managing Editor: Felicia Day
Assistant Editors: John Anderson and Adrienne Foerster

Welcome to the RFF Policy Commentary, which is meant to provide an easy way to learn about important policy issues related to environmental, natural resource, energy, urban, and public health problems.

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The New Economics of Managing the Nation’s Waste
Molly K. Macauley and Stephen W. Salant
August 10, 2009

While the development of large, state-of-the-art landfills encouraged greater interstate shipments of solid waste, regulations and taxes affecting these shipments have also proliferated. This week, Molly Macauley and Stephen Salant discuss how such policies raise the overall costs of managing waste disposal in the United States.

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The New Economics of Managing the Nation's Waste

It’s an industry worth over $40 billion dollars a year and the bane of every city mayor—managing the nation’s solid waste stream.

Some 15 years ago, we disposed of most of our waste at the local dump. New environmental regulations that took effect in the 1990s as a result of the Resource Conservation and Recovery Act (RCRA) led to the closure of most local dumps and, in their place, the opening of a smaller number of large, state-of-the-art landfills. These new facilities required that waste be hauled long distances, often across state boundaries.

A funny thing happened on the way to the landfill, however. Local governments began to get involved in the waste market. Intervention took many forms, but because it affected interstate transport of waste, each gave rise to legal challenges on the basis of the U.S. Constitutional provision (the “commerce clause,” Article 1, Section 8) for unimpeded transport of goods and services across state lines.

For example, states that hosted large landfills began to require their state’s waste go to that landfill, even if the waste was generated in a jurisdiction for which the nearest fill was just over the border in a neighboring state. This practice arose in states for which the scale of operation of the landfill required large amounts of waste.

Other states jealously guarded their landfills, and prohibited imports of waste from other states, deeming the state landfill a precious resource with limited capacity reserved for in-state waste only.

In some cases, jurisdictions levied fees on out-of-state waste. Sometimes jurisdictions justified these on the basis of needing to finance bonds issued to build the landfill. Jurisdictions also intervened to manage waste flows to achieve scale economies at recycling and incineration facilities.

In West Virginia, which, along with the state of Washington, regulates waste through state Public Service Commissions, the commission put in place a set of licensing and other requirements for out-of-state waste haulers.

These interventions all have had the effect of restricting waste flows and impeding their least-cost management. A more cost-effective approach would take into account the distance between where the waste is generated and the nearest disposal facility, plus the cost of transportation, the remaining capacity in the disposal facility (a measure of opportunity cost), and other factors. Distorting the interplay of these factors can reduce benefits of cost-effective waste management for households. Although it can transfer benefits to owners of waste disposal facilities, the net effect on society is likely to be cost, not benefit.

Disentangling these effects on households and waste facility owners has been the subject of research by the authors.  We estimated the total loss and, given the new pattern of landfill location, the regional distribution of losses and gains across the nation under different kinds of interventions, including state and local requirements stipulating where waste must be landfilled, prohibitions on the import and export of waste across state boundaries, quantitative limits on these flows, and extra fees levied on imported waste.

In all cases, overall social welfare declines, but some geographic regions, consumers, and landfill owners bear relatively higher costs than others. For example, the discounted present value of the reduction in overall social welfare over the 20-year period if trade is prohibited is about $3.8 billion, or twice as much as volume-based restrictions capping the size of the waste flows or imposing $1 per-ton surcharges. The losses are largest for consumers and producers in the Northeast, where waste exports are large and smallest for those in the Midwest.  Short of prohibiting trade entirely, the largest loss in discounted social surplus occurs under a policy that restricts the maximum volume between states and does not allow states to trade at all unless they had been “grandfathered in” because they had been trading before announcement of the policy.

In addition, and perhaps most important, some policies to restrict exports may substantially increase the number of interstate waste shipments as some states export smaller volumes to more destinations in order to meet limits on the size of shipments to any one state.

The courts have been extremely busy in hearing the legal arguments for and against interstate restrictions. High-level courts have heard nearly 20 cases and the U.S. Supreme Court has heard two. By and large, most decisions, including the first of the two Supreme Court findings, struck down restrictions. But the most recent decision, in 2007, found the opposite: the court held that because the waste disposal facility was owned by the local government, the commerce clause would “allow for a distinction between laws that benefit public, as opposed to private, facilities.” But in the dissenting opinion, three judges held that the “public-private distinction drawn by the Court is both illusory and without precedent.”

Our story is thus one of technological change (from the town dump to state-of-the-art regional landfills) in response to regulation (as set forth in RCRA) and the transformation of a local market into a national one. The recent Supreme Court decision notwithstanding, the new economics of our waste market emphasize the advantages of unimpeded trade among states.

Further Reading:

Eduardo Ley, Molly K. Macauley, and Stephen W. Salant. 2002. Spatially and Intertemporally Efficient Waste Management: The Costs of Interstate Trade Restrictions. Journal of Environmental Economics and Management 43: 188–218.

Molly K. Macauley. 2009. Waste Not, Want Not: Economic and Legal Challenges of Regulation-Induced Changes in Waste Technology and Management. RFF Discussion Paper 09-11, June. Washington, DC: Resources for the Future.

Porter, Richard. 2002. The Economics of Waste: Policy Instruments, Waste Management and Site Cleanup. Washington, DC: RFF Press.

Molly K. Macauley is a senior fellow at Resources for the Future. She specializes in space economics, the economics of new technologies, recycling and solid waste management, climate policy, and incentive-based environmental regulation. 

Stephen W. Salant is a professor of economics at the University of Michigan specializing in industrial organization and natural resource economics and a nonresident fellow at RFF. He previously worked at the Federal Reserve Board, and at the Rand Corporation, where he served as the first editor of the Rand Journal. 

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