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Market Based

If an economist has perfect information than it would be easy to determine the optimal way to correct for an externality. Unfortunately, there is no way for an economist to have perfect information. In nearly all cases we have to make estimates about what the benefits, private costs, and social costs are of a good. According to Wietzman's theory of uncertainty when demand for a good is elastic standards perform better than taxes; however, when demand for a good is inelastic taxes perform better than standards. Since the demand for plastic bags is elastic, we could assume that standards perform better under uncertainty. This is because if we choose a tax that is too high it will result in a large deadweight loss. This deadweight loss also depends on the social cost to society that plastic bags cause. This social cost could either be very small or very large depending on the discount rate used. When determining the social cost you have to consider the private costs plus the externalities caused from producing and transporting the bags, the costs of  disposing  the bags, cleaning up litter, and environmental damage. Some of these costs are immediate while others occur over a long period of time. The latter costs when discounted at any rate even hyperbolic rates  become tiny on this timescale. That is why I would not discount at all. In fact I would set a tax that would nearly eliminate plastic bag usage. This would ensure that the environment stays protected from pollution. To achieve my goals it may seem that a complete ban would be better than a tax; however, as a budding economist, I of course favor a market instrument. A ban would eliminate all plastic bags but this may not be optimal. Plastic bags are still needed in some cases. Plastic bags are great at preventing contamination from raw meat or fish. Market instruments give people the choice of how to respond to the new price. They also give businesseses an incentive to innovate in order to reduce their taxes and maximize their profits. The tax that I would use would also be paid by the consumer so as to follow the polluter pays principle and thus change consumer behavior. To see some real world examples of market based instruments used to compensate for the externalities caused by plastic bags click next.

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