The Environmental Paradox of Free Compost

This activity is designed for principles courses. Students are expected to have covered supply and demand. Optional: for more in-depth discussion, students will have covered consumer surplus, producer surplus and deadweight loss (DWL).

There are no class size limitations.

This activity may take an estimated 20 minutes. This activity should take one class period.

Overview

In this activity, students will analyze possible rationing devices for distributing compost to a community. The choice of a rationing device has implications for not only the producer and consumer, but also environmental outcomes.

Students will advise the best rationing device for a free compost giveaway by a waste management company in the Los Angeles area.

Expected Student Learning Outcomes

Students will be able to analyze the effectiveness of different rationing devices for distributing goods in markets.

Information Given to Students

Mulch/compost giveaways occur in many major cities across the USA. For this activity, let's focus on one example from the Los Angeles area:

Valley Vista Services (VVS) is a waste management company serving the Los Angeles area, collecting trash, recyclables, and compostables which get composted/mulched on site, the latter having environmental benefits.* Occasionally, VVS provides free mulch and compost to the serviced areas. The flier below advertises this: https://www.valleyvistaservices.com/wp-content/uploads/2020/01/1-1-20-mailer-BVSSJH-Mulch-Compost-Giveaway-Jan-Mar-2020-EL.pdf

Question:
The manager of VVS in charge of the compost giveaway asks you as an economics student which rationing device achieves the best outcome of doing the most good for the most people?

A) Use "First-Come, First-Served": continue to set the price at $0 (free) and allow those who come first to take up to the limit of 1 cubic yard per vehicle.

B) Use "Equilibrium Price": charge for each yard of compost at roughly the going market rate, and use all proceeds to donate toward compost projects at local schools.

C) Use an "Income-Based" Distribution: If household income is lower than a certain threshold, that household gets a voucher for free compost & mulch. 

D) Use a "Lottery": Give people a random chance to get free compost, and issue only the number of winning lottery tickets equal to the amount of compost available.

E) Use "Equal distribution": Have VVS drop equal amounts of compost at each doorstep to all residents in the qualifying area.

*Composting is generally environmentally & societally beneficial: it diverts would-be landfill waste to nutrients for gardening/crops, reduces greenhouse gas (GHG) emissions, and helps to store carbon in soils, among other benefits. Mulching also has significant environmental benefits.

Prefatory Remarks:
1) Hook/Teaser: How many of you care about compost? Well how many of you care about the environment?
2) Introduce rationing devices: Let's go through an exercise about a free compost giveaway and I want us to consider how different ways of distributing (rationing) the compost to society may have different outcomes for consumers and for the environment.

3) OPTIONAL SCENARIO & GRAPH: During a free mulch & compost giveaway in 2022, VVS had about 250 cubic yards of compost to distribute, and around 400 vehicles (many trucks) arrived in the 4-hour giveaway time window. Let's assume each vehicle was allowed 1 cubic yard total, so there was enough compost for 250 vehicles. The average wait time for vehicles to get compost was about 1 hour. 
Draw the graph of supply & demand together: On the x-axis can be "yards of compost/mulch" where 1 yard of compost is equal to 1 vehicle. The supply curve can be modeled as vertical, since VVS doesn't have a strong incentive to change their compost production when the price rises or falls in this case. The demand curve for compost is downward-sloping. Demonstrate the magnitude of the shortage at a price of $0: Qd = 400 and Qs = 250, so the magnitude of the shortage is 150 cubic yards of compost.

Answer Explanations:
For each response, we will list its impact on goals of two different criteria: 1) consumers and 2) environmental outcomes. The producer always meets their goal of distributing all the compost.

A) "First-Come, First-Served" is the default for free compost giveaways. 1) Consumers reach their goal (consumers who value compost more likely will show earlier and wait longer), though consumers end up paying in time & fuel costs. 2) Environmental outcomes are poor, the price of $0 creates a large shortage, so vehicles will idle/wait for a long time, burning fuel which creates poor air quality (PM2.5), traffic, and excess CO2 emissions.

B) "Price" is ideal from an economic perspective, though may be perceived negatively by the community. 1) Consumers reach their goal (those who value compost more than the price will buy), 2) Environmental outcomes are good, only those willing to buy will show, reducing wait times by vehicles and reducing the number of vehicles total that travel to get compost.

C) Concerns about inequality are important and can make for a good discussion on "fair" distribution of goods. 1) Consumers may not reach their goal, since there may be people with higher incomes who value compost a lot, 2) Environmental outcomes can be good, only those given a voucher will show.

D) Lotteries are common, and can be perceived as quite fair. 1) Consumers may not reach their goal, since those selected may not be the ones who value compost the most, but those who select in to try for the lottery likely value the compost to some degree 2) Environmental outcomes can be good, only those given a lottery ticket should show up to get compost.

E) Equal distribution can be perceived as quite fair. 1) Consumers will not reach their goal since some households who don't value compost at all will be given compost. 2) Environmental outcomes are okay, there's economies of scale in a single large vehicle hauling compost, but there is inefficiency in bagging & delivering compost to households who will not use it.

Answer: The best is (B), with (C) and (D) being defensible. (A) and (E) address possible misconceptions as (A) is the standard practice for how it is done in many areas.

Some possible follow-up questions:
1) In the flier, VVS uses a "First-Come, First-Served" with a price of $0. For those who receive compost for free, are they paying anything?
(they pay in time costs, fuel costs, & vehicle depreciation)
2) Why is the "First-Come, First-Served" with a price of $0 a paradox from an environmental standpoint?*

*Final Remarks: Explaining the Paradox
1) Idling vehicles burn fuel, which is costly to a consumer but also damaging to the environment. An idling vehicle can burn between 0.15 to 0.4 gallons of fuel per hour.* (source: https://www.energy.gov/eere/vehicles/fact-861-february-23-2015-idle-fuel-consumption-selected-gasoline-and-diesel-vehicles)
2) For 400 vehicles to average an idle-time of ~1 hour for compost, and assuming an average fuel consumption of 0.25 gallons per hour, this could be approximately 100 gallons of fuel burned. This does not include the 150 vehicles that may not get any compost and the travel time they incur (the 250 vehicles that DO get compost may have otherwise traveled a similar distance to purchase the compost). This also doesn't include environmental damages of vehicle depreciation or damages associated with excess driving (e.g. tire rubber waste on roads, excess traffic and downstream effects, etc).
3) An optimal distribution of compost might be: 250 vehicles arrive, and wait-times could be ~10 minutes. This would reduce idling fuel consumption to roughly 10 gallons (250 vehicles wait for ⅙ of an hour at an idling fuel consumption rate of 0.25 gallons per hour on average: 250*⅙ *0.25 = 10.4). Fuel consumption from idling is reduced by a factor of 10 if an optimal rationing device could be implemented!
4) Burning a gallon of gas produces about 20 pounds of CO2 (which is a GHG that contributes to climate change), so an excess burning of 90 gallons of gasoline from free compost leads to around 1800 pounds of excess CO2, which is getting close to 1 ton (2200 pounds) of excess CO2 generated!

Final notes regarding externalities:
This topic and scenario is not meant to cover externalities, although this could lead into a discussion of the nature of externalities in markets. The primary negative externalities of gasoline burning is best modeled in the market for gasoline, not in the market for free compost. If a Pigouvian tax is already placed on gasoline, then the cost onto society of the externality has already been taken into account in the price of gasoline, and ideally would already give consumers the incentive to not want to idle/wait as long for free compost.

Essay question:
Assume a new cancer drug is developed by a private company that basically cures nearly all types of cancer. The government requires that the private company distributes the cancer drug at a price of $0 via a "First-Come, First-Served" rationing system.
Discuss the impact of this system with regard to the producer and the consumers: first, list what an economist would consider to be the goal(s) of the producer & the consumers in this market, and second discuss how well the "first-come, first-served" rationing device reaches those goals.

Three multiple choice questions:
1) A new virtual reality system is developed, and the producers want to distribute their product via a "lottery" rationing device, where each person who wants the device has one chance to be drawn in the lottery. This "lottery" mechanism will:
A) Guarantee that the consumers who value the product the most will get the product.
B) Guarantee that the consumers who value the product the least will get the product.
C) Distribute the goods randomly among those who value the product a lot and those who value the product a little bit.
D) Distribute the good systematically to those who value the product a lot.
(Correct Answer: C)

2) The rationing device of "Price" is generally preferred by economists for distributing most goods to society. The advantage of using "Price" on the consumer-side of a market is:
A) Consumers who value the good the most are most likely to pay the price to get the good.
B) Consumers who value the good the least are most likely to pay the price to get the good.
C) The distribution of goods via "Price" is random, so consumers who value the good a lot are equally likely to get it compared with consumers who do not value the good a lot. 
D) The distribution of goods via "Price" is systematic, such that every consumer who wants the good will get at least some of the good. 
(Correct Answer: A. The reason why "D" is not the best answer is because wanting the good "at least a bit" is not enough for a consumer to purchase the good. Consumers should want the good at least as much as the price of the good.)

3) The rationing device of "Price" is generally preferred by economists for distributing most goods to society. The advantage of using "Price" on the producer-side of a market is:
A) Producers have an incentive to produce more if more people want the good and price rises. 
B) Producers have an incentive to produce less if more people want the good and price rises. 
C) Producers have an incentive to produce the same amount if more people want the good and price rises. 
D) Price gives producers a benchmark target: producers will increase or decrease production to target a certain price for their good. 
(Correct Answer: A)

1) Flier for free compost & VVS website:
https://www.valleyvistaservices.com/wp-content/uploads/2020/01/1-1-20-mailer-BVSSJH-Mulch-Compost-Giveaway-Jan-Mar-2020-EL.pdf
https://www.valleyvistaservices.com/company

2) Damages & regulations of idling vehicles:
https://www.epa.gov/sites/default/files/2020-10/documents/webinar.antiidling_1.pdf
https://www.energy.gov/eere/vehicles/fact-861-february-23-2015-idle-fuel-consumption-selected-gasoline-and-diesel-vehicles
https://afdc.energy.gov/files/u/publication/idling_personal_vehicles.pdf

3) Summary of environmental benefits of compost:
https://www.epa.gov/recycle/composting-home