Plastic Bags and Externalities: How Cities Use Taxes to Address Pollution

        As the effects of pollution and climate change become increasingly visible, governments around the world are taking action. On January 1st of last year, the City of Charlottesville implemented a five-cent ($0.05) tax on disposable plastic bags provided to customers at checkout in grocery stores, convenience stores, and drugstores within City limits. Essentially, this tax aims to limit the negative pollution externalities by disincentivizing individuals from using single-use plastic bags and incentivizing individuals to use reusable alternatives. As said on the City of Charlottesville Government website, 

“While this does not eliminate the use of plastic bags altogether, it incentivizes the use of reusable materials like bags, boxes, and baskets to transport purchased items. An important provision of the ordinance requires that the revenue from the 5-cent tax be funneled into environmental education, pollution clean-up, and providing reusable bags for SNAP and WIC recipients.”

Therefore, through collective action allowing for government intervention, the negative pollution externalities of plastic bags can be internalized through a market-based solution. 
        As explained by Ronald Coase in “The Problem of Social Cost,” if property rights are well-defined and transaction costs are low, private parties can negotiate and reach efficient outcomes without the need for government intervention. However, in this case, property rights over the use of plastic bags (the right to pollute) are not well defined, and the transaction costs in negotiating compensation for this widespread pollution are high, making a private solution impractical. Therefore, government intervention is needed to manage this externality efficiently. Overall, a tax on plastic bags is an efficient solution, as it internalizes the external costs while creating an economic incentive for both producers and consumers to reduce their plastic bag consumption.