Many purchase coffee because it is addictive, it has been shown to have withdrawal effects (Bodnariuc, 2019) 39% of British people are consuming more coffee than they did a year ago. Nottingham has many coffee shops with the 24,000 already in the UK (Pinchess, 2018). The demand for the coffee cups is predicted to increase according to the growth of coffee consumption and there are concerns regarding the environmental problems related to the production and disposal of the coffee cups (Environmental Audit Committee, 2018). The University of Nottingham is a ‘green’ university (Nottingham.ac.uk) and is committed to reducing the consumption of the disposable cups.
Assuming a perfect free market and that people think rationally, it’s possible to see the position of the market equilibrium and size of producer and consumer surplus in Figure1.
P1Q1 is the intersection of the supply and demand curves; this is the price the consumers are satisfied with (Economics 4th Edition) (no shortage or surplus at this point). Assuming that coffee is an inelastic good there is a larger consumer surplus as consumers are willing to consume the coffee even at a higher price. Producer surplus is the amount of disposable cups the producer is paid for minus cup production cost.
Initial equilibrium
P3
Figure 2
Figure2 shows the formation of deadweight loss because of negative consumption externalities; the social marginal benefit is less than the private marginal benefit. Q1P1 is where the disposable cups are being overconsumed because there is a high demand of coffee in Nottingham and makes the market inefficient, so the equilibrium needs to shift down to Q*P2 where the socially optimum level is. Since disposable cups and coffee are complements a government intervention is needed to increase the market efficiency such as a levy on the disposable cups. Since there are negative externalities, a Pigouvian tax can be implemented (Tejvan Pettinger, 2016) which will increase market efficiency by reducing the marginal external costs. The difference of P1 and P3 represents the constant price of the tax on each disposable cup consumed. This will internalize the externality and cause consumers to consider not only private cost but also the external costs on the environment when consuming the disposable cup.
Figure3 shows the effects of the Pigouvian tax. The supply curves are parallel because the levy is constant. Also, the supply curves aren’t from the origin because the tax is short-term. P1 is the initial price, P2 is what the sellers get without tax and P3 is the price including tax. The levy causes a decrease in the consumer surplus (green) and producer surplus (blue) as well as the formation of deadweight loss because we are making more than social optimum (shown by the orange area). The difference between P3 and P2 multiplied by Q2 is tax revenue represented by the pink area which is what the university gains from the sale of disposable cups; it will be used to invest in an intervention. Since the demand for coffee is inelastic, the burden of the tax is mostly on the consumers. The inelasticity of the demand means that there will be a smaller deadweight loss and greater revenue from the levy so more money to invest in helping the environment (Tejvan Pettinger, 2016). The quantity decreases due to the law of demand; as the price goes up for cups there is less demand, so less people buy disposable cups.
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The potential correction is that it causes the demand curve for disposable cups to move to the socially optimum level so market failure is supressed; the intervention should reduce usage of disposable cups. An advantage is that it will reduce the external costs such as litter, on the environment as less coffee cups will be used. The revenue from the levy can be used to provide recycling bags and promoting recycling. However, a disadvantage of the intervention is that it causes deadweight loss, so the market is inefficient. Also, the demand for coffee is inelastic so imposition of a tax will be less effective.
In conclusion, the levy will be effective in reducing the effects on the environment. The revenue should be used to make advertisements and make posters on negative impacts of using disposable cups and display them around the campus. Also, the levy should not be too high, it may cause a large reduction in coffee demand as students turn to substitutes such as tea or energy drinks. The levy should promote consumers to invest in a reusable cup for daily coffee consumption.
References:
Authority of the House of Commons (2018). House of Commons Environmental Audit Committee Disposable Packaging: Coffee Cups Second Report of Session 2017-19 Report, together with formal minutes relating to the report by authority of the House of Commons. [online] Available at: https://publications.parliament.uk/pa/cm201719/cmselect/cmenvaud/657/657.pdf. [Accessed 09 Nov. 2019].
Bodnariuc, D. (2019). What is Coffee – Coffee Facts, Statistics and Effects of Coffee on Health. [online] Coffee Brewing Methods. Available at: https://coffee-brewing-methods.com/coffee/what-is-coffee/ [Accessed 10 Nov. 2019]
Nicholas Gregory Mankiw and Taylor, M.P. (2017). Economics. 4th ed. Andover Cengage Learning, pp.42–43.
Nottingham.ac.uk. (2019). Green Initiatives – The University of Nottingham. [online] Available at: https://www.nottingham.ac.uk/hr/your-benefits/your-environment/green-initiatives.aspx [Accessed 18 Nov. 2019].
Pinchess, L. (2018). There’ll be more coffee shops than pubs by 2030 – which do you prefer? [online] nottinghampost. Available at: https://www.nottinghampost.com/whats-on/food-drink/therell-more-coffee-shops-pubs-1438823 [Accessed 10 Nov. 2019].
Tejvan Pettinger (2018). Pigovian Tax | Economics Help. [online] Economicshelp.org. Available at: https://www.economicshelp.org/blog/glossary/pigovian-tax/. [Accessed 10 Nov. 2019].
Tejvan Pettinger (2016). Tax incidence | Economics Help. [online] Economicshelp.org. Available at: https://www.economicshelp.org/concepts/tax-incidence/. [Accessed 12 Nov. 2019].
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