Help With Some ECON1101 Questions (1 Viewer)

[Shadowless]

Residents of your city are charged a fixed weekly fee of $6 for rubbish collection. They are allowed to put out as many bins as they wish. The average household disposes of three bins of rubbish per week under this plan. Now suppose that your city changes to a ‘tag’ system, under which each bin of rubbish to be collected must have a tag affixed to it. The tags cost $2 each and are not reusable. What effect do you think the introduction of the tag system will have on the total quantity of rubbish collected in your city? Explain.

What I'm thinking is you talk about:

- sunk costs... $6 ?
- relate it to the scenario (somehow o.o)

Then I'm not really sure about the rest, except if they do introduce the tags, there will be less bins? (Not sure how to incorporate economics into it.)

 

[moll.]

Residents of your city are charged a fixed weekly fee of $6 for rubbish collection. They are allowed to put out as many bins as they wish. The average household disposes of three bins of rubbish per week under this plan. Now suppose that your city changes to a ‘tag’ system, under which each bin of rubbish to be collected must have a tag affixed to it. The tags cost $2 each and are not reusable. What effect do you think the introduction of the tag system will have on the total quantity of rubbish collected in your city? Explain.

What I'm thinking is you talk about:

- sunk costs... $6 ?
- relate it to the scenario (somehow o.o)

Then I'm not really sure about the rest, except if they do introduce the tags, there will be less bins? (Not sure how to incorporate economics into it.)

You're misreading the question. It says the tags aren't reusable, which means they get destroyed each week, forcing people to purchase more tags. Basically they've replaced the fixed fee ($6 per week) with a variable fee ($2 per bin, averaging $6 a week).
The answer they are looking for is that total rubbish should remain approximately the same. The average consumer will still be spending the same amount (3 bins @ $2) so will have no change. Those above three bins may decrease their rubbish quantity as people's costs are now in proportion to their quantity of rubbish, so quantity will fall to save costs. Those below may increase, so net gain will probably be zero.
However, it may be worthwhile to point out studies by Dan Ariely that show that when a social cost (not putting out more rubbish than your neighbours and looking like a slob) is monetized (the $2 fee) then costs to the consumer can actually decrease and the good/service can often be found to be used at a higher quantity. Ariely did it with late fees for parents picking up kids late from after-school care and found an increase in the amount of late parents once the late fee was introduced.

 

[Shadowless]

You're misreading the question. It says the tags aren't reusable, which means they get destroyed each week, forcing people to purchase more tags. Basically they've replaced the fixed fee ($6 per week) with a variable fee ($2 per bin, averaging $6 a week).
The answer they are looking for is that total rubbish should remain approximately the same. The average consumer will still be spending the same amount (3 bins @ $2) so will have no change. Those above three bins may decrease their rubbish quantity as people's costs are now in proportion to their quantity of rubbish, so quantity will fall to save costs. Those below may increase, so net gain will probably be zero.
However, it may be worthwhile to point out studies by Dan Ariely that show that when a social cost (not putting out more rubbish than your neighbours and looking like a slob) is monetized (the $2 fee) then costs to the consumer can actually decrease and the good/service can often be found to be used at a higher quantity. Ariely did it with late fees for parents picking up kids late from after-school care and found an increase in the amount of late parents once the late fee was introduced.

Wow, so detailed.

Hmm.. Today I had an economics tutorial and from what I recall the tutor said something along the lines of...

- cost-benefit analysis
- if you compare both cases you will see that the 'benefits' one receives from putting out rubbish would be the same in both cases, however, the marginal costs (?) would be different
- in the first scenario, there would be no marginal cost for putting out more rubbish, however in the second case, a marginal cost exists ($2)
- thus, with the introduction of the new tag system, the total quantity of rubbish collected in the city would most likely be reduced

^ Not sure if I recalled everything he said, but I'm pretty sure that's a part of what he said. (Feel free to add more if you think I've left something out.)

Anyways, let's say this came up as an exam question. Would/Should I include that 'studies by Dan Ariely'?

 

[deswa1]

Residents of your city are charged a fixed weekly fee of $6 for rubbish collection. They are allowed to put out as many bins as they wish. The average household disposes of three bins of rubbish per week under this plan. Now suppose that your city changes to a ‘tag’ system, under which each bin of rubbish to be collected must have a tag affixed to it. The tags cost $2 each and are not reusable. What effect do you think the introduction of the tag system will have on the total quantity of rubbish collected in your city? Explain.

What I'm thinking is you talk about:

- sunk costs... $6 ?
- relate it to the scenario (somehow o.o)

Then I'm not really sure about the rest, except if they do introduce the tags, there will be less bins? (Not sure how to incorporate economics into it.)

Total rubbish collected will go down. This is because households now have an incentive to reduce the amount of rubbish they put out.

From a cost benefit point of view, look at it like this- under the old system, the $6 covers everything. The marginal cost of putting out another rubbish bin is $0 so a rational person will put out rubbish until marginal cost=marginal benefit so until marginal benefit is $0. Under the new system, the marginal cost of another rubbish bin is $2 so people will keep putting out bins until the marginal benefit- so the benefit of putting out an extra bin is $2. Obviously marginal benefit will become lower than $2 before it becomes lower than $0, so under the new system, rubbish putting out goes down and hence collection.

 

[Shadowless]

Total rubbish collected will go down. This is because households now have an incentive to reduce the amount of rubbish they put out.

From a cost benefit point of view, look at it like this- under the old system, the $6 covers everything. The marginal cost of putting out another rubbish bin is $0 so a rational person will put out rubbish until marginal cost=marginal benefit so until marginal benefit is $0. Under the new system, the marginal cost of another rubbish bin is $2 so people will keep putting out bins until the marginal benefit- so the benefit of putting out an extra bin is $2. Obviously marginal benefit will become lower than $2 before it becomes lower than $0, so under the new system, rubbish putting out goes down and hence collection.

Oh.. so similar to my 10:46pm post?

BTW deswa what course are you doing this year?

 

[moll.]

Wow, so detailed.

Hmm.. Today I had an economics tutorial and from what I recall the tutor said something along the lines of...

- cost-benefit analysis
- if you compare both cases you will see that the 'benefits' one receives from putting out rubbish would be the same in both cases, however, the marginal costs (?) would be different
- in the first scenario, there would be no marginal cost for putting out more rubbish, however in the second case, a marginal cost exists ($2)
- thus, with the introduction of the new tag system, the total quantity of rubbish collected in the city would most likely be reduced

^ Not sure if I recalled everything he said, but I'm pretty sure that's a part of what he said. (Feel free to add more if you think I've left something out.)

Anyways, let's say this came up as an exam question. Would/Should I include that 'studies by Dan Ariely'?

Yeah, I cocked up. I was mostly focused on the relevance to Ariely. The people who put out less than the average now would conventionally be assumed to still put out the same (or even less) after the system changes.

Wouldn't bother mentioning Ariely in an exam. The marker is unlikely to give you brownie points. Just an interesting note and maybe a point of discussion in your tutorial for some participation marks there.

 

[Shadowless]

I see...

Thanks for your help XD

 

[deswa1]

Oh.. so similar to my 10:46pm post?

BTW deswa what course are you doing this year?

Ahh yep- sorry I didn't see that haha.

And I'm doing commerce/law