Aligning Incentives

How much should we price convenience? We should probably price it based on the damage it makes. If you’re picking up something on your way and that saves time for someone else, it does cost you that tad bit of time so it makes sense for that someone else to compensate you up to the cost you’re bearing.

These transactions can result in efficiency in the system. But the cost have to be identified easily. When we place the onus of providing a plastic carrier on the seller of wares/goods, we are getting them to price convenience to the buyer. Unfortunately it is usually mispriced because the material, production are not all the cost that goes into the lifecycle of the plastic bag.

So even though the individual marginal costs holding all else constant are rising slowly, the joint social marginal costs rises really quickly. As usual, when costs are dispersed and benefits are concentrated (just like tariffs on sugar in US), you have an issue. We cannot ignore the importance of aligning incentives here and if the government wants to pander to the market and take the microscopic view, we’re all doomed to fail.

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