A COST EFFECTIVENESS ANALYSIS:
HOUSEHOLD REWARDS AND RECYCLING IN THE CITY OF DAVIS

Stephanie Jamelske

PPA 220A, Applied Economic Analysis I, Fall 1998
Graduate Program in Public Policy and Administration
California State University, Sacramento
Professor Rob Wassmer

December 17, 1998

I. INTRODUCTION

In response to the increasing rate that Americans are filling landfills, most state legislatures have enacted mandatory diversion quotas of waste going to landfills. In a municipality such as Davis, California, where the responsibility for recycling falls on individual households, do the benefits of recycling outweigh the costs? This paper will conduct a simplified cost benefit analysis of Davis’ curbside recycling program from the perspective of the average household. Once the indirect and direct costs and benefits of participating in the recycling program are calculated, does the average household have the incentive to participate in the program?

Policy context

In 1989, the California State Legislature passed Assembly Bill 939, the Integrated Waste Management Act (AB 939). Among other goals, this act called for municipal jurisdictions to divert 25% of their waste going to landfills by 1995 and to divert 50% of their waste by 2000. To implement this goal, AB 939 mandated that each municipality develop a Source Reduction and Recycling Element (SREE). Since Davis had a pre-existing recycling tradition, AB 939 and its SREE offered Davis two opportunities: first it offered the city an opportunity to solidify this tradition into policy; and second, it gave the citizens of Davis the opportunity to participate in developing this policy.

Davis’ approach is simple: citizens separate recyclables at home. These recyclables are collected by the city’s contracted hauler, Davis Waste Removal (DWR), who sells the materials to a recycling processor. Following this simple formula, Davis reached 50% diversion in 1996, a full four years ahead of AB 939’s mandate. Since Davis chose to stay with their existing recycling program rather than enact a more sophisticated secondary recovery program, it may be useful to verify if the costs of administering the program are indeed effective in terms of the benefits Davis households derive from participation. These results may be useful to the department responsible for oversight of the program, the Department of Public Works, for use in policy review and evaluation.

Policy Necessity

Since recycling activity predates recycling policy in Davis, it seems unlikely that government intervention to establish formal policy was necessary. However, without the mandated quotas supplied in AB 939, Davis may have continued to divert less than half of their waste. As is frequently the case in public works, governments must provide a service because the private sector has no incentive to establish a market. Governments then use regulation to control outcomes in these markets, specifically in cases where the service creates a spillover effect. In waste disposal, the higher the quantity of waste going to regional landfills, the quicker these landfills reach capacity and municipalities face increasing costs in finding alternative sites. This perceived "capacity" crisis prompted the state to implement diversion mandates. In effect, AB 939 forced municipalities to internalize some of the external effects of providing public works. Because failure to recycle creates an externality problem, where the marginal social cost of not recycling (the quicker fill of landfills) outweighs the marginal private cost of not recycling (forgone leisure), government intervention in an effort to coerce recycling is justified.

The Role of the Household

Davis’ curbside recycling program relies on individual households to feel obligated to participate in the program; moreover, the households are directly responsible for the policy’s success. Because the household plays a crucial role, it is important to estimate the effectiveness of their participation in terms of what it costs the average household. The individuals who make up the average household in Davis, therefore, have standing in this analysis.

Organization

This paper is organized in the following sections: the second section provides a brief review of relevant literature that will assist in understanding some of the issues of assessing recycling programs. The third section discusses alternative approaches to curbside recycling and some considerations of alternative policies. Following this, the fourth section will be an analysis of the benefits and costs associated with Davis’ program. The fifth section will discuss the sensitivity of the benefits and costs in terms of quantifiability. Finally, the concluding section will discuss the implications of the policy in light of the cost benefits analysis, as well as suggesting some areas of further research.

II. LITERATURE REVIEW

Research on recycling programs has proliferated in the past decade due to an increase in states requiring diversion quotas or otherwise promoting recycling through mandates. Yet, specific studies measuring the costs and benefits to households are infrequent. A common theme among most of these studies repeats the notion that it is relatively easy to measure the costs of recycling programs which tend to be small if looked at on a per household basis. What are more difficult to measure are the benefits gained by households in curbside recycling programs.

Ackerman (1997) concludes that estimating cost-effectiveness of curbside recycling programs will remain difficult as long as prices for recycled material buybacks remains volatile. Yet Ackerman suggests that even in cases where a community receives no revenue for the resell of recyclables, the average annual cost per household of $31, "does not impose a crushing burden" in terms of benefits derived, including meeting mandates or avoided tipping fees. 1 Ackerman suggests that the external benefits of recycling are not adequately represented in current cost-benefit discussions and that impacts such as improved environment should receive standing in cost-benefit analysis. Indeed, Ackerman is correct in his concluding statement that standard CBA will continue to cast an unfavorable light on recycling programs until there is an effective method for measuring the intangible benefits earned by households. Ackerman could have included a sensitivity analysis for the range of prices per ton that would make the average curbside recycling program profitable. However, even without a sensitivity analysis his article is useful for getting analysts to think beyond the bottom line in terms of valuing benefits.

Lake, Bateman, and Parfitt (1995) attempt to overcome the inadequacies Ackerman and other analysts point to by constructing a method for valuing the benefits received by households in a recycling program.2 Lake et al. conduct a contingent valuation study in an English community to calculate these people’s willingness to pay (WTP) for a curbside recycling program. Lake et al. then aggregate this data to construct the community’s demand curve. From this, they can estimate the community’s consumer surplus as well as determine net social surplus.

First, Lake, Bateman, and Parfitt look at the previous recycling program and draw some conclusions that are generally supported by other authors: they find a positive association between quantity of garbage and quantity of recycling; and they also find those households who are recycling are doing it a lot, so that policy efforts aimed to increase recycling need to be directed to those who do not recycle. To get an accurate estimate of households’ WTP, Lake et al. first administered an open-ended survey so respondents could name a bid, the price they would be willing to pay. After that data had been analyzed, they followed up with a dichotomous choice survey, forcing respondents to chose among the previously collected choices. After a number of statistical evaluations and a flurry of theoretical analysis of their findings, the authors conclude that for this community, the aggregate WTP is high enough to cover the costs of the curbside recycling program so that a small positive net benefit is generated.

Again, in Lake, Bateman, and Parfitt paper the mantra is repeated that because recycling programs tend to have high start up costs analysts seek to include a valuation of the positive externalities generated to offset the costs. Specifically, analysts must recognize that people associate recycling with values such as improved environment, conservation of resources, social obligation, and fair-share contribution. This article is particularly relevant to the case of recycling in Davis for a number of reasons. First, the authors note that their case study is atypical because their subject community has higher than average education and income, so WTP of these residents is expected to be higher. This suggests that we may be able to extrapolate their findings of a small (but positive) net benefit to a similar community such as Davis, which may have a similar understanding of their role in a recycling scheme. Second, also like Davis, their subject community already had a recycling program in place. Therefore, the authors are technically measuring WTP to avoid the loss of their program. This could suggest that in communities where the existing recycling program is popular and participation is already high, individuals have a preconception of the benefits they receive and a predetermination that the benefits outweigh the costs. Finally, this article provides a model for conducting a contingent valuation survey to estimate a community’s net social surplus.

As with Ackerman, some discussion of the sensitivity of the program’s small (but positive) net benefits to changes, demographic or otherwise, may have been useful in getting other researchers to investigate these variables. However, pursuing this analysis would have greatly expanded the scope of their study. Lake et al. conclude that households value the altruistic, or "psychic," benefits from recycling. Their conclusion is directly applicable to this paper because the benefits derived by Davis recyclers have not been quantified. Moreover, these authors find that since most household costs of participation are small, most people will agree that their benefits outweigh their costs of participation. This supports Ackerman’s point that even if a program does not pass a cost-benefit analysis, it does not impose a huge cost. Lake et al. succinctly clarify the difficulties surrounding valuation of psychic benefits.

The third and final paper reviewed here looks at the efficiency of curbside recycling programs by conducting an experiment. Judge and Becker (1993), "monitored the quantity of material that households recycled under increasingly more convenient (and increasingly costly) programs," until they found a level of service that equates the program’s marginal cost to diversion’s marginal benefit. The experiment was conducted by tweaking four variables of program design: frequency of pick-up, sorting requirements, the location residents have to place the bins for pick-up, and the amount of recycling educational material the household receives. Judge and Becker find that, "allowing residents to commingle recyclables, offering weekly collection, and permitting a household to put the recycling bin at any convenient location on the property increases the amount of recyclable material that a household diverts, ceteris paribus." (Judge and Becker, 63.) Interestingly, all households in the experiment were charged a mandatory $2 per month fee on their utility bill to specifically cover the recycling program, whether or not they participated.3

In their analysis of the marginal costs the authors do a superb job of sorting out some of the ex-household costs. Specifically, the authors find that offering a lower level of service, the least convenient program for participants, actually generated a higher marginal cost because of the high fixed costs associated with establishing the program, including the purchase of trucks and the hiring of haulers. Yet, conversely, the program with more frequent pick-ups results in higher diversion rates but does not have a noticeable change in mc. Therefore, Judge and Becker suggest municipalities must decide the level of service where mc=mb and thus net benefits are maximized or at least net losses are minimized. They conclude that previous recycling performance should be an indicator of which level of service municipalities should chose. When considering a cost-benefit analysis of diverting material from a landfill, the best program may not serve the best (i.e. larger) interests.

The most valuable contributive element from this work is the authors’ discussion of the variables they overlooked. Specifically, Judge and Becker acknowledge that household’s benefit-costs analysis should be based on the indirect benefits derived by households, "which include decreased scarcity of virgin materials as recycled materials become more plentiful, household recyclers’ sense of purpose, and greater public awareness of the solid waste problem." In addition to these indirect benefits are the indirect costs to households, "which include the implicit rent on household space devoted to storing recyclable material between pick-ups and household labor costs of preparing recyclable material for retrieval." (Judge and Becker, 59). Moreover, the authors suggest these omitted costs would have only a minor impact on the results of their study for two reasons. First, since participating in recycling is voluntary, "participating households obviously gained benefits that were at least as great as the costs they incurred. For example, they may have benefited from the satisfaction derived from frugality and from conserving resources and landfill space so as to pass on a better world to their heirs." Second, household participation may be based on, "what the neighbors do rather than on the programs merits or convenience. Thus a neighborhood with a critical mass of avid recyclers may recycle more than one would expect, given the convenience of the program offered." (Judge and Becker, 67).

The omission of these variables does not weaken Judge and Becker’s analysis because their focus is on landfill diversion. Instead, this discussion of omitted variables and their possible relationship to higher diversion rates suggests areas for further research. Some of these variables are particularly relevant to Davis’ program because the community already has high participation rates. Therefore, if policy-makers in Davis hope to push beyond 50% diversion, they must consider their line of attack, or which variables are likely to up diversion: fostering the "keeping-up with the Joneses" attitude, tweaking the convenience variables in the level of service provided, or renewing focus on altruistic benefits. Policy-makers in Davis will need to know what residents already value about their existing program. A first step in determining this value is the simplified cost-benefit analysis done in this paper. A next step would be a more complicated contingent valuation survey of Davis residents’ willingness to pay as modeled by Lake et al. A final contribution may come through the adoption of Ackerman’s philosophy that the bottom line must extend beyond quantifiable costs and benefits to include the value society derives from an improved environment.

III. PORTFOLIO OF ALTERNATIVE PROGRAMS

Status Quo

The city of Davis is not currently considering any alternatives to their recycling program. In fact, the program is working according to design and will probably only be modified in the unlikely event that the Integrated Waste Management Board raises diversion quotas.

Previously to this policy was tradition. Davis residents began one of the West Coast’s first recycling efforts with a drop-off station for newspapers in 1970 and soon expanded their program to include bottles and some metals. In 1974, the city contracted with DWR to begin curbside recycling of newspaper; and by 1976, DWR was picking up glass, metal and plastic as well. Davis’ program has won several achievement awards and its citizen participation has earned it the reputation as one of California’s most aggressive recycling cities. Considering this, the status quo for Davis, then, is an established recycling tradition that serves a policy need.4

Possible Alternatives

Because the program is effective in terms of diversion it seems unlikely that the City will pursue any alternatives. However, if the quota were to move beyond 60%, Davis will need to consider how they can bolster diversion beyond the curbside. One method is to introduce a secondary sorting element in which manual laborers physically sort out recyclables from the waste stream once it has been collected and before sending it to the landfill. This can include the diversion of organic material to compost. An extreme example of secondary sorting is Folsom California’s recycling policy. In Folsom, residents place all waste in a single container and inmate labor separates the recoverables from the waste stream. Within two years of the program’s inception it reached 54% diversion, four years ahead of AB 939’s schedule and 4% above the diversion rate achieved in Davis. Eventually, Folsom would like to expand their program so that the remaining organic material will flow to anaerobic digesters where a bio-gas will be drawn and sold to the local utility, thus achieving 100% diversion. However, there is an important element missing from this utopian alternative, the citizen. Folsom’s program requires nothing more from the citizen than for him to put everything into his trash can. Not only is this a missed opportunity to foster ecological awareness, but Folsom residents may be incurring the indirect cost of denied psychic benefits discussed earlier.

Nevertheless, Davis might consider a less extreme secondary sorting element for future implementation. Such a program could be implemented with relatively little cost if the city has existing facilities it can convert to this purpose. It may be practical to consider if secondary sorting provides a disincentive for participation at the household level. A more thorough analysis of Folsom’s policy may yield some understanding into that relationship. For now, however, Davis’ program works well. Still, is it cost effective?

IV. COST BENEFIT ANALYSIS FOR HOUSEHOLDS

Costs

The program costs households very little. Bob Weir, Director of the City of Davis Department of Public Works, states residents pay $21.72 per week for a bundle of waste related services. Of this, $2.93 goes directly to the recycling program, in this case to privately owned Davis Waste Removal (DWR) who contracts with the city. The city pays no additional revenue to DWR; the recycling program is funded by $2.93 paid by Davis’ 12,884 household plus the variable rate paid by Davis’ businesses.5 Another cost incurred by Davis residents is the indirect cost of the time it takes to sort recyclables. In doing this (sorting, rinsing, storing) there is an opportunity cost of what else these people could have been doing with their time. Economists believe a fraction of the average wage rate is the best forgone alternative to doing something else. Since recycling activity is likely to take place during cleaning or food-preparation activities rather than in place of actual wage-earning work, I will use 20% of forgone wages as the opportunity cost of participating in recycling.6 Based on observation, about one hour a week total is consumed by recycling and recycling related activities. Therefore, if the average hourly wage rate in Davis is $12.26, then Davis residents may have the additional cost of $12.26*.2 an hour for participating in recycling. The total cost is: $2.93+($12.26*.2)=$5.38 per week per household.7

Benefits

Davis households receive no tangible benefits from participating in the recycling program. The only benefits received are psychic, or altruistic, benefits. How can we quantify these benefits? First we can consult existing literature, the Lake et al. study. If we are to use this study as a model for quantifiable benefits, then we must consider the results of the contingent valuation survey. Of the 2/3 of respondents who reported they were willing to pay some value, none rejected the lowest range levels up to about $7.40, which suggests that people are at least willing to pay the cost of the program. A portion of respondents did not reject the $22.20 per fortnight (two weeks) bid level, suggesting that some respondents may be willing to pay more than the total costs for participating in recycling.8

However, it seems that qualifying the benefits derived by Davis households is more relevant to this study as a comprehensive contingent valuation survey has yet to be undertaken of Davis households. To qualify these benefits we must again refer to the existing literature. Some of the benefits derived mentioned so far include: decreased scarcity of virgin materials as recycled materials become more plentiful, household recyclers’ sense of purpose, greater public awareness of the solid waste problem, the satisfaction derived from frugality and from conserving resources and landfill space so as to pass on a better world to heirs, and the notions of social obligation and fair-share contribution. From a purely self-interested perspective, we can categorize some of these benefits from most likely to generate individual (or household utility) to least likely. The results of this prioritization can be seen in Figure 1.

Figure 1: Utility Generating Benefits Derived from Recycling

This continuum shows a variety of psychic benefits households could claim they receive from recycling. If a majority of Davis households reported deriving only the most self-interested benefits, it still may be enough compensation to cover the $5.38 of participating in the program.

Benefits versus Costs

If the majority of Davis household’s reported a similar willingness to pay as Lake et al.’s lowest bid, $7.40, then the Davis program would pass a cost benefit analysis. Figure 2 shows a cost benefit comparison.

Figure 2: Costs and Benefits

It is likely that Davis’ households will attach a similar dollar value to these benefits. Therefore, the program passes cost benefit analysis.

Relevant Benefits

An important note here is that sometimes analysts attach arbitrary values to intangible non-market goods so they will find favorable cost benefit analysis values. This assertion is particularly important when one considers the dire and far-reaching consequences policies can have: intentionally inappropriate calculations can result in social harm from imposed costs. Therefore, to justify the use of the utility continuum and the associated assumption that as long as a majority of the survey sample would agree that they receive some level of benefits from participating in recycling, we can defer to Ackerman’s statement that the costs to the household do not impose a "crushing burden."

Justifying Assumptions

How can this assumption be justified? First, Davis’ program has strong voluntary participation which suggests participants must believe they are getting some benefits from contributing. Second, municipal recycling programs (as a whole, not at the household level) rarely pass cost benefit analyses because the market for resell recyclables is both meager and volatile while the start up capital costs of municipal recycling programs are substantial. Therefore, the recycling phenomenon is itself demand driven by consumers who want to recycle.9 Finally, Ackerman provides the clearest reason yet why we can assume recyclers derive utility from participation: recycling goes beyond, "the right thing to do," and is a core value:

Suppose…that we view recycling as akin to a religious practice, as an organized expression of widely held ecological values. The language and symbolism of recycling support this point of view. Any church needs rituals and observances, and curbside recycling provides the opportunity for the weekly offering and collection. After collection there is the modern miracle of transubstantiation, as old packages and papers come to life again. In states that have deposits on beverage containers, it is common to speak of the process of redemption.10

Essentially, Ackerman is asserting that people who recycle are devoted to the activity. Thus, recyclers may not consider the economic costs of participation as costs at all, but more as a necessity.

Social Surplus and Cost Effectiveness

From a larger social perspective, tangible benefits (such as material diverted from landfill, avoided tipping fees, or avoided penalty imposed by state) go to the municipality and thus, society in general. Using the Kaldor-Hicks criterion, then, as long as the winners (the municipality and its citizens)

could compensate the losers (the households with no tangible benefits) and still be better off (cleaner environment) then we should pursue the policy. From any one of these perspectives, quantitative versus qualitative, use of external applications or the Kaldor-Hicks criterion, Davis’ curbside recycling program is cost effective.

V. SENSITIVITY ANALYSIS

Uncertainties

The uncertainties of the values of the benefits in this study could have a major impact on the findings. Unfortunately, until a contingent valuation survey is preformed to assess Davis household’s willingness to pay, this value will remain unknown and must be inferred by constructing a shadow price from other studies and qualifying the benefits through argument.

Range of Values

In order for the program to show positive net benefits for Davis households, the contingent valuation study will need to find a mean value greater than $5.38 for the amount Davis households would be willing to pay to avoid the loss of the program.

Other Variables

One factor that may effect Davis’ willingness to pay might be if ennui replaced the aggressive spirit Davis recyclers now have. However, considering the already high participation rate and Ackerman’s comments on perceived recycling mentality, it is unlikely that an indifferent attitude will emerge. Moreover, Because Davis’ program is a codification of existing practice, we should expect it to prosper into the future. Recycling behavior rests on Davis’ household’s enthusiasm for recycling, and the demographic make up of these households is unlikely to alter significantly. Therefore, it is reasonable to predict that Davis will at least retain their 50% diversion into the future.

VI. CONCLUSION

Results

Davis should continue the curbside recycling program. Households are likely receiving enough benefits from participating in the program to compensate them for the costs of the program. Although the size of the net benefits remains undetermined, a contingent valuation study can provide the necessary data to support (or disprove) this hypothesis.

Considerations for the City of Davis

The city should consider how information about households’ willingness to pay could be used to predict changes that may arise from changes, such as price or level of service, in policy. Perhaps the most direct application of this data is the discussion of where Davis’ households will go from here in terms of participation. What if the city (or the state) pursues a higher level of diversion? The city might consider a policy of commingling recyclables, rather than the current policy of separating recyclables, to increase the level of diversion.

Recommendation

Currently the program is built on a "4R" platform: "reduce, reuse, recycle, and re-buy." Yet, most emphasis seems to be on the third R, and the current level may be a plateau. If Davis hopes to push past 50% diversion, they will have to expend more effort (and build up public enthusiasm for) the first and second R’s, reduce and re-use. Other municipalities may admire Davis’ program, but few will find it as efficient as Folsom’s. Therefore, while Davis may continue to win good-citizen type recycling accolades, it is unlikely to inspire other communities looking for models on which to base new programs. Instead, communities without a strong citizen tradition will embrace "efficiency-first" policies like Folsom’s and forego the social surplus associated with environmental citizenship. Davis must incorporate the other three R’s by shifting them into the public’s awareness the same way rinsing bottles and cans and putting them in a bin is now.

Recommendations for Further Research

Clearly a contingent valuation study needs to be undertaken to estimate a consumer surplus value for households in Davis in order to fully address the cost-effectiveness question. Such a study would

contribute to the existing body of literature by offering external validity, as the Lake et al. study does. Fully understanding the complexity of a demand driven public policy in the absence of measurable benefits is a worthy topic for further research.

REFERENCES

Ackerman, Frank. "Cost-Benefit Analysis: Recycling: Looking Beyond the Bottom Line," Biocycle.
May 1997.

_____. Why do We Recycle? Markets, Values and Public Policy. Washington, DC: Island Press, 1997.

City of Davis Department of Public Works, Garbage Guide. November 1998, 4^th edition.

Judge, Rebecca and Anthony Becker, "Motivating Recycling: A Marginal Cost Analysis,"
Contemporary Policy Issues. July 1993 v11.

Kimball, Debi. Recycling in America: A Reference Handbook. Santa Barbara: ABC-CLIO, Inc., 1992.

Lake, Iain R., Ian J. Bateman, and Julian P. Parfitt. "Assessing a Curbside Recycling Scheme: A
Quantitative and Willingness to Pay Case Study," Journal of Environmental Management. March 1996 v46 n3.

Weir, Bob. Interview, November 17 1998, Davis, California.

ENDNOTES

1. Frank Ackerman. "Cost-Benefit Analysis: Recycling: Looking Beyond the Bottom Line," Biocycle. May 1997.

2. Iain R. Lake, Ian J. Bateman, and Julian P. Parfitt. "Assessing a Kerbside Recycling Scheme: A Quantitative and
Willingness to Pay Case Study," Journal of Environmental Management. March 1996 v46 n3.

3. Rebecca Judge and Anthony Becker, "Motivating recycling: A Marginal Cost Analysis," Contemporary Policy
Issues. July 1993 v11.

4. City of Davis Department of Public Works, Garbage Guide. November 1998, 4^th edition.

5. Interview with Bob Weir, November 17 1998.

6. The closest analogy to recycling I can verify in terms of the value of time is recreation/leisure. Although undoubtedly most individuals derive more utility from traveling to a place of recreation, the two activities are similar in that they both generate utility for the participant, albeit recreation/leisure more so than the perceived altruistic benefits from recycling. Nonetheless, since travel time is estimated to be worth 40-60% of forgone wages, I chose a slightly smaller but still significant portion of forgone wages as the opportunity cost of recycling. See Boardman et al. (1996) for a more thorough discussion.

7. Estimated hourly wage in Davis $10.62 according to 1990 census. Figure adjusted upward to December 1997 value.

8. These are figures I extracted from their statistical model, and then converted from 1993 British Pounds to 1993 US dollars. (Lake et al., 1996)

9. Debi Kimball. Recycling in America: A Reference Handbook. (Santa Barbara: ABC-CLIO, Inc., 1992)

10. Frank Ackerman. Why do We Recycle? Markets, Values and Public Policy. (Washington, DC: Island Press, 1997), 9.

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