Socru-Ewn. Plllnn. Ser. Vol. &I. tio. I. pp. l-9. 1990 Prmred I” Grcar Bream. All nghts reserved

0038-01?1/90 53.oo+o.lm Copyright C 1990 Pergamon Press plc

A Second-Best Tax for Litter Abatement ROBERT E. KOHN

Department of Economics, Southern Illinois University at Edwardsville. Edwardsville, IL 62026. U.S.A.

and

DAVID PINES Department of Economics. Tel Aviv University, Ramat Aviv 69978, Israel

(Received October 1989; received for publication January 1990)

Abstract-To combat a serious litter problem in Israel, a law has been enacted that authorizes fines for littering and imposes an ad colorem lax on disposable beverage containers. This tax, which has been controversial, can be justified on second-best grounds, given constraints on the magnitude of the fine and on the quantity of resources available for enforcement. and given that beverages in disposable containers and littering are net complements. In this paper, the optimal second-best tax rate is estimated and found to exceed the current ad ~wlurem tax rate on containers.

INTRODUCTION

The problem of a littered environment is especially severe in Israel. Many of its inhabitants come from less developed countries in which littering is acceptable. With a population density of “nearly 200 inhabitants per square kilometer. . . one of the highest in the Western world” [ 15, p. 151, Israel’s public places are intensively used and extensively littered. The problem is aggravated by a lack of rainfall to periodically wash away the litter or hasten its disintegration. Until 1984, when the Muinwwnce of Cleanliness Law was enacted, public concern for landscape conservation in Israel was dominated by more pressing worries over security and, consequently, very little was done about the problem of’ 1itter.t

In an accelerated effort to make up for past neglect, the Muinrenance of Cleanliness Law prohibits littering in public places and provides an infrastructure for reporting violations and imposing fines. It also imposes a 0.25% “cleanliness maintenance charge” on the value of disposable beverage containers. Whether such a tax is justified is controversial for in this often hot, dry country, frequent fluid intake can be vital to health and the advent of disposable drink containers has been beneficial. Given that the social “bad” is the act of littering rather than of using disposable containers, the efficiency of the ad culorem tax on all disposable containers has been publicly questioned.

This paper contributes to resolving the controversy over the ad valorem tax. We examine the conditions under which the imposition of such a tax and its specific rate are plausible. We begin by deriving the marginal condition for a first-best solution, which requires a Pigouvian tax on littering in the form of an effective fine. We attempt to calculate the values of the efficient and of the actual expected fines for littering and find that the actual expected fine is negligible relative to the efficient expected fine. Given that there are political and other constraints on the magnitude of the fine and on the quantity of resources for enforcement, it is our conclusion that the advalorem tax on the litterable material can be an appropriate second-best policy instrument. We derive the marginal condition for the second-best tax on disposable drink containers and then endeavor to calculate its magnitude in the Israeli context. If a fixed proportion of all beverage containers is littered, we estimate that the 0.0025 tax rate is only a sixteenth of the warranted second-best tax rate (which. in the fixed proportions case, is also a first-best tax). Alternatively, if a variable

tThe tradeoff in Israel of defense appropriations for landscape conservation and social services is the subject of Schechter and Barnea [l6]. The principal features of the Muinrennance of Cleanliness Law, 1984 are summarized in Whitman (20, pp. 201-202. 247-2481.

I

2 ROBERT E. KOHN and DAVID hms

proportion of containers is littered, the existing rate of 0.0025 is the optimal second-best tax rate only if the cross elasticity of the compensated demand for beverages with respect to the effective fine on littering is smaller than -0.05. But then the contribution to economic efficiency of such a tax is questionable. We conclude that the tax rate of 0.0025 is either too low relative to its appropriate magnitude, or that a second-best tax of the kind considered in this paper, although operating in the right direction, is quantitatively almost useless.

THE BASIC MODEL

In this section we present a model in which the efficient level of littering is determined. To start, assume a homogeneous population of n persons, each of whose utility function is strictly quasi-concave in X, Y and Z,

u = u(X, Y, z, L). (1)

The production possibilities of this economy are represented by the equation,

f(X, Y) = 0. (2)

The quantity X represents consumption by each person of a composite, nonlitterable good, whereas Y represents the consumption of beverages from disposable containers, measured in standard container units.

The quantity Z represents the number of disposable containers that are littered by each person. In some situations it is convenient to litter such containers after use, or if they are accidentally littered, not to retrieve them; accordingly, we assume that the marginal utility of littering, au(.)/aZ, is positive in the initial range.? The quantity L represents the public “bad” associated with the total flow of litter, nZ. That &(.)/dL is negative follows from the fact that L is aesthetically displeasing and a potential cause of personal injuries, The model would be more realistic if it included a variable for litter collection by the government, but for simplicity we assume that the litter pulverizes, decomposes, or rusts away in a single period so that the stock equals the flowt; that is

L =nZ. (3)

Let X serve as a numeraire good so that its price is one. Let P be the relative price (in terms of the numeraire) of Y, and F the relative price of Z, that is, the expected fine on littering in terms of the numeraire. We can write the Hicksian compensated demands for the three goods as

X = x(P, F, L, U), (4)

Y = y(P, F, L, U), (5)

and

Z =r(P, F, L, U). (6)

Substituting (4) and (5) into (2) and then (6) into (3), we obtain a more compact description of

(1 H6):

and

j-[XV, F, L, 0 HP, F, L WI =a

nz(P, F, L, U)-L =O.

(7)

(8)

tAn alternative to the variable, 2, would be the number of beverage containers, D, properly disposed of after use. in which case SU( .)/r?D would be negative at the outset and the quantity littered by the individual would be (Y - D). The choice of Z rather than D simplifies the analysis. The sequential way that Z affects utility is analogous to that in Harford (3. p. 281 where the cost to the firm of polluting ‘*. . . is negative over a range from zero pollution up to some level.. .(and) becomes positive after this point.” In our specification, we are interested in the initial range where the marginal utility of littering is positive.

IFor models in which litter decomposes over many periods and can be recovered by government clean-up services and by scavengers, see Smith (171 and Lee el ~1. [8].

A second-best tax for litter abatement 3

Equations (7) and (8) describe allocations that satisfy the following property: given P and F, U is determined so that the quantities demanded are feasible. Thus (7) and (8) yield U as a function of P and F. The problem is to choose the P and F that maximize U (first-best) or, if F is constrained to F,, to choose the optimizing (second-best) P. This is an indirect way of presenting the first and second-best issues, but it will prove to be convenient for interpretation.

THE FIRST-BEST TAX ON LITTERING

Maximizing U by choosing P, F, L and U, subject to (7) and (8), yields the following necessary conditions:

XI + (fi/f)v, + (B/a) (n/Y&, = 0 (9)

x2 + (fi/Y& + (B/a) (n/fi)z2 = 0 (IO)

Il(xfi) - [x4 + (_!U)v4 + (P/a) @Khl = 0 (11)

XI + UU)n + (P/a) (n/!)zj - [Pl(zl;)l = 0 (12)

where subscript i denotes a partial derivative with respect to the argument that appears in the ith place in the function (for example, x, = %~(.)/aL), and a and /_I are the Lagrange multipliers of (7) and (8), respectively.

We know from the derivative properties of the expenditure function that

x, + Py, + Fz, = 0 (13)

and

x2 + Py2 + Fz2 = 0. (14)

Subtracting (9) from (13) and (IO) from (14) yields a system of linear equations that can be presented as

p -I;lfi 0

F-(Bla)(nlfi) = 0 ’ 1 III (1%

The matrix on the left-hand side of (15) is a principal minor of a Slutsky matrix of substitution terms and is, therefore, nonsingular. It follows that the unique solution to the linear equations is the vector of zeros, implying -

and

P =f2ti (16)

F = (B/a) (nti). (17)

Substituting (16) and (17) into (1 I), the latter becomes

I/(afi) =x4 + Py4 + Fz, = dE(P, F, L, uyau = I/~, (18)

where E(r) =x(e) + Py(.) + Fz(.) is the minimum expenditure function, u, is the marginal utility of the numeraire and l/u, is the marginal cost of utility in terms of the numeraire. Substituting (16) and (17) into (12), that equation becomes

x,+Py,+Fz,-F/n=E,-F/n=-u4/u,-F/n=0 (19)

so that

-n[u,/u,] = F.

From &he definition of compensated demand, FE u~/u,, it follows that

UJU, = --n [u4/u,l,

(20)

(21)

4 ROBERT E. KOHN and DAVID PINFS

which is the well known Pigouvian prescription for optimal taxation. The left-hand side is any individual’s marginal rate of substitution of the numeraire good for littering while the right-hand side is the sum of the units of good X that all n persons together are willing to give up to prevent the marginal unit of littering by that one person. It should again be emphasized that n represents the entire population, and that all persons are identical in (I) their inclination to litter, (2) their degree of exposure, and (3) their aversion to the littered environment.

Turning to the implementation of (21) there are three methods for taxing littering. The first, which is not used in Israel, is the imposition of a mandatory deposit on all disposable containers, so that to recover their deposits, consumers must return the empty containers. In a major study of this approach in Michigan, Porter [l3, p. 1771 finds that “Beverage-related litter did fall dramatically, by some 85%. and the rate at which consumers returned ‘empties’ to redeem their deposits was quite high, around 95%.” Those consumers who chose to litter their containers were in effect paying a tax equal to the forfeited deposit of 5-10 cents per bottle. However, because of the costs and inconveniences imposed upon consumers and merchants, Porter [l3, p. 1771 concludes that he is unable to prove that the mandatory deposit approach to the litter problem is “. . . capable of passing a social benefit-cost test.“? In addition to the inconvenience of returning bottles, Porter [ 12. pp. 363, 3661 finds that the lack of storage space for empty bottles both in homes and stores can be a serious problem, one that would be aggravated in Israel where living spaces and grocery stores are much smaller than in the United States. Moreover, one of the benefits of mandatory deposits in the United States, the reclamation of aluminum cans (see Porter [l4, p. 1921). would be absent in Israel where beverage cans are a combination of steel and aluminum and therefore not conducive to recycling. Although there continues to be interest in Israel in a program of mandatory deposits and reusable bottles, such an approach has thus far been rejected as infeasible there.

A second method for indirectly taxing littering, which also is not used in Israel, would be a program in which consumers are paid to deliver used beverage containers to recycling centers. Whitman [20, pp. 198-2001 reports that there is some recycling of glass bottles in Israel and that public bins are placed in neighborhoods and near supermarkets to receive waste paper; however, there are no financial incentives for using these facilities. A program could be developed in which people are paid to deliver their used beverage containers to collection centers, in which case those failing to redeem them because of, say littering, would in effect be paying an opportunity cost to litter. Whether such a program would be economically feasible or would significantly reduce littering remains to be demonstrated. To formally demonstrate the first-best efficiency of mandatory deposits or recycling incentives requires a model in which the problems of solid waste disposal are incorporated. This goes beyond the scope of the present model which focuses on the fine and tax features of the Maintenance of Cleanliness Law.$

The third method for taxing litter, which is used in Israel, is the imposition of fines for littering. Under the Mainrenance of Cleanliness Law, fines of 16-135 shekels per violation (approx. IO-90 dollars) have been authorized. In the first full year of operation, the equivalent of $80,000 in fines was collected by approx. 8000 government workers and other citizens who volunteered, in their spare time, to be inspectors or trustees with an official authority approaching that of marshals or policemen to take the names and addresses or license plate numbers of persons they see littering. Citations are sent to violators, who are expected to pay their fines by return mail. If they choose to argue their case in court, they fact a maximum fine equivalent to $2000. This program has grown to include more than 16,000 inspectors and trustees.

In the case of a fine on a polluting activity. the effective fine is the actual fine times the probability of being apprehended. It follows that there are infinitely many combinations of actual fines and corresponding probabilities that generate the efficient expected Pigouvian tax. In general, the more

tFor a more recent study concluding that the costs of mandatory bottle deposits in the U.S. may exceed the benefits, see Lesser and Madhavan [9].

$11 is the prevailing view of the Environmental Protection Service of Israel that the sole purpose of the Mainrenonce of Cleanliness Luw is the reduction of litter, and that fines and a tax on containers are the appropriate tools. It is of interest that Lee CI 01. [RI present a model in which mandatory deposits on beverage containers are first-best and fines for littering are second-best. In their model. however, the focus is solely on littered containers while no attention is given to the inconvenience. storage, and other costs that are of concern to Porter [I21 and to Lesser and Madhavan 191.

A second-best tax for litter abatement 5

resources allocated to enforcement. the greater the probability of apprehending violators and the

smaller the fine needed to achieve the efficient Pigouvian tax rate.t It is possible, however. as Harford [4, p. 501 notes, that “. . the maximum fine is a parameter which constrains the possibilities open to the regulator.” In the case of Israel, there are severe problems of internal and external security that do limit the availability of enforcement and judicial resources. Furthermore, the evidence (presented below) on the low rate of citing violators demonstrates that the system of volunteers does not provide an effective alternative enforcement process. As a result, the effective fine in Israel appears to be less than optimal.

The following is an attempt to estimate and compare the magnitudes of the expected fine on littering and the efficient effective fine. This estimate is unfortunately very crude due to a lack of pertinent data for Israel, requiring us to use data from the United States and from Europe. The Environmental Protection Service of Israel calculates, on the basis of the revenue that they raise from the on cdorenr tax on disposable beverage containers and on their estimate of SO.05 as the average value of a container, that approx. I .5 billion disposable beverage containers are consumed each year in Israel.: Using Porter’s [12, p. 3561 lowest estimate of the littering rate in Michigan prior to the imposition of mandatory bottle deposits, it will be assumed that 4% of the disposable containers are littered. Porter [ 12, p. 3561 also reports “. . . that beverage containers make up about

60% of all litter by volume but only about 20% by piece-count”. We shall, accordingly, assume that the ratio of citations in Israel for littering beverage containers to the total number of citations for all littering is the average of these two percents, i.e. 40%. Assuming that the doubled number of volunteer inspectors doubles the fines collected to the equivalent of $160,000 a year, it follows that the expected fine for littering a bcvcrage container in Israel is the annual total of fines for littering beverage containers, which is ($160.000) (0.40). divided by the number of beverage containers littcrcd. which is (1,500,000,000) (0.04), or approx. SO.001 per beverage container

littcrcd. For an cstimatc of the social cost of littered beverage containers. we turn to a Swedish study

by Lidgrcn [IO] which takes into account injuries to people (In one 6-month period in Sweden, 25,000 pcoplc were injured by litter) and to animals, damages to farm machinery, cleaning up costs, negative acsthctic effects, etc. Lidgrcn [IO, p. 1491 concludes that “. . . calculated per used beverage

container, the (damage) cost would be about 10 ore,” which is equivalent to approx. $0.015 per

container. Unfortunately, this damage estimate is based on costs “for all littering” and is allocated to all bcvcrage containers used. Lidgren [IO, p. 1491 provides data comparable to Porter’s [12, p. 3561 on the basis of which it may be assumed that beverage containers account for approx. 40% of all litter costs in Sweden. Assuming that 4% of beverage containers are littered in that country, the adjusted damage estimate is ($O.OlS) (0.40)/(0.04) or SO.15 per littered beverage container. However, national income per capita in Israel is less than half of that in Sweden [21, pp. 175-176, 2601, and the proportion of alcoholic beverage containers, which may be the most objectionable, is smaller in Israel than in Sweden [18, Table 13901. We may therefore conservatively assume that the marginal willingness to pay to eliminate beverage container litter in Israel, which is -~[u,/u,] in our model, is only one third of the estimated average damage per littered beverage container in Sweden, i.e. equal to $0.05.

The actual expected fine of SO.001 per littered beverage container is only 2% of the estimated social cost of $0.05. Because the expected fine on littering in Israel is negligible relative to its social cost, we take this as a binding constraint in our model. In the next section we consider Israel’s controversial udw/orenr tax which, given this binding constraint, may then qualify as a second-best instrument.

tHarford [3. p. 2X] notes that this interpretation of the efficient Pigouvian tax is based on the assumption that polluters are risk neutral. If polluters are risk averse. Polinsky and Shave11 [I I J show that there is a specific fine that is optimal. For the seminal work on the economics of tines. see Becker [I]. For a recent analysis of the economics of adminisrering a system of fines. see Lambe 171.

:The Environmental Protection Service collects S193.ooO a year on the 0.0025 oJ r&rem tax. Given their estimate of SO.05 for the average value of a disposable container. the annual consumption is S193,000/((0.002S) (SO.OS)]. This is equivalent IO approx. 355 drinks per year by each of Israel’s 4.2 million inhabitants. (This is somewhat less than the annual consumption of 440 drinks from disposable containers by Michiganders in 1979. See Porter [13. p. 1921,.

6 ROBERT E. KOHN and DAVID PINES

SECOND-BEST PIGOUVIAN TAX ON THE LITTERABLE GOOD

Given the constraints on either the actual fine or on enforcement resources, or both, the question arises as to whether the supplementary tax on disposable containers in Israel is a second-best policy instrument. Furthermore, if it is a suitable instrument, the next question is whether the ad calorem

tax rate is plausible. These questions are addressed in this section. We start with the implementation of the tax in Israel, turn to some theoretical considerations, and conclude with an evaluation of the tax rate.

The Maintenance of Cleanliness Law authorizes a 0.25% tax on the value of disposable containers for all drinks other than milk. There are fifty manufacturers and importers of these containers, who periodically fill out a form indicating the sales value of each kind of container and compute the tax which is remitted with the form. The bookkeeping costs associated with the tax, for both the Environmental Protection Service and for the firms that pay it, are considered to be quite small.

The revenue from the tax on beverage containers is used to fund a program of public education for a litter-free environment, which includes classroom programs for schoolchildren, posters, radio and television messages, warning stickers on buses, and national clean-up campaigns. In addition, money from the tax is used to provide additional pickups of trash and abandoned vehicles and for the installation of thousands of new permanent litter baskets. It may be noted that this is one of the very few spending programs in Israel that is funded by earmarked taxes and might not exist had the legislature not been convinced that it was justified by the “polluter pays principle”. Assuming that the public education and clean-up program is cost-effective, it should be indepen- dently supported from general revenues. The efficiency of the tax on disposable drink containers is therefore independent of how the revenue is used and is based solely on its relative price effect, as elaborated below.

Suppose that F is effectively constrained by some upper bound F0 such that

F - F, = 0. (22)

The second-best problem is to choose P, II and L subject to (7), (8) and (22). The necessary conditions are (9). (I I), (I 2) and

x2 + (f2/h)y2 + (P/a) (n/W2 - yl(cl/;) = 0 (23)

where y is the Lagrange multiplier of (22). We obtain from (9), (13) (14) and (23) the following system of linear equations in (P -f2/fi) and [F - (/3/a) (II/‘)]:

(24)

The solution of this system is

where

P -h/A = -~,bAl(rlfi)l

F - (P/a) (n/J) =vhMdJl

(25)

(26)

A = y,z2 - c,y2 > 0. (27)

This inequality follows from the rationale given for the unique solution of (I 5) above.? We exclude the possibility that utility can decrease with resources (i.e. a < 0). The effective

constraint on F implies that Jo is also positive. We can therefore conclude that the term in square brackets on the right-hand side of (25) and (26) is positive. Assuming that beverages in disposable containers, Y, and littering, Z, are net complements, which is not implausible, so that the effect of P on Z is negative, it follows that 2, < 0, and then, from the compensated demand definition, P 3 u2/u,. that

u2/4 >/2/f,. (28)

tFrom the derivative property of the expenditure function. it follows that (y,z, - z,y,) equals (E,,E,, - E,,E,,). Because of the concavity of the minimum expenditure function in prices (see Varian [19. p. 123J), it follows that (E,, Ez2 - E12EXI) exceeds zero.

A second-best tax for litter abatement 7

This implies a second-best tax, I, equal to -r,[~A/(a/,)] per unit of soft drink Y, sold in a standard litterable container. That second-best theory can be used to justify a tax that might otherwise be distorting has precedence in the seminal paper by Corlett and Hague [2]; the basic intuition is the same for their problem as it is for ours, even though the nature of the two problems is different.

Given our low estimate of the effective fine on littering relative to the social cost, we may conveniently assume that F, = 0. It follows from (22) and (26) that

Y =BnlLsv,. (29)

Using the definition of the second-best tax and equation (25), and then substituting (29) into (25), we find:

1 = p -fiti = [(B/a) (nfi)l (ZllYl). (30)

As in the first-best case, the term in square brackets in (30) represents the marginal social cost of littering, -n[u,/u,]. Now define qr as the compensated demand elasticity for littering with respect to P, the price of beverages in disposable containers, and q,, as the compensated demand elasticity for beverages in disposable containers with respect to their own price. Equation (30) can then be rewritten as

I = -nIUM (alrt,) (Z/Y). (31)

Equation (3 I) allows us to easily interpret the result; it says that the second-best tax on beverages in disposable containers is equal to the marginal social cost of littering times the ratio between the price of beverage effects on the compensated demands for littering and for disposable beverages. The second-best tax increases with the compensated cross elasticity, qz, and decreases with the compensated own-price elasticity, lc. The reason for this is straightforward. On the one hand, the second-best tax reduces excessive littering, thereby decreasing the distortion which is involved in the unpriced externality. This desirabletffect is positively related to the compensated cross elasticity, Q. On the other hand, the second-best tax discourages the consumption of beverages in disposable containers, thus introducing a distortion in the consumption pattern between the composite good and beverages. This undesirable effect is positively related to the compensated own-price elasticity, qr. The greater the strength of the first effect relative to the second, the higher is the second-best tax.

If. for example, the compensated cross elasticity is zero or the compensated own-price elasticity is infinite (i.e. disposable packaged drinks Y and the composite good Xare perfect net substitutes), the second-best tax should be zero. Alternatively, if littering is a fixed proportion of beverages consumed (i.e. the ratio Z/Y is constant), then the two elasticities are the same and (31) simplifies to I = -n [uJu,]Z/ Y so that, except for units of measurement, second-best and first-best coincide; the tax on all disposable beverage containers is then equivalent to the efficient fine on containers actually littered. In what follows, we attempt to provide some crude evaluation of the warranted tax rate.

Although the term in square brackets in (30) is the marginal social cost of littering, it is not the first-best tax. The reasoning is that the bracketed term is evaluated at the second-best allocation whereas -n [u&l is evaluated at the first-best allocation. If, however, we disregard this distinction, use our estimate of %0.05 as the true value of -n[u,/u,], 4% as the proportion of beverage containers littered, and Heien and Pompelli’s [5, p. 7631 estimate of -0.7 for the compensated own-price elasticityt, then

t = ($0.05) (&J-0.7) (0.04). (32)

We still require an estimate of the compensated cross elasticity, q,, in order to derive an evaluation of r. In the special case in which the ratio Z/Y is constant (so that +/qy= I), the warranted tax, which is then a first-best tax, becomes approx. $0.002 per beverage. The

tThe expenditure on non-alcoholic beverages in Israel is 1.8% of total consumplion (18, Table 1390). Using this figure together with the U.S. expcnditare elasticity, which is dese to 1.0 for soft drinks [S]. it follows from the Slutsky equation that the price elasticity of the compensated demand is close lo that of the ordinary demand. (The difference is about 0.018.)

8 ROBERT E. KOHN and DAVID FINES

interpretation of the tax in this special case is straightforward. It is the marginal damage per littered container times the fraction of containers that are littered.

Given that the average material cost of a container is $0.05, the corresponding ad oaforem tax rate, T, on the material value of disposable drink containers is

T = $0.002/%0.05 = 0.04. (33)

The ad aalorem tax in Israel, which is 0.0025, is thus approximately one sixteenth of the warranted second-best ad u&rem tax rate of 4% in the above, albeit special case. More generally, only if q._ is smaller than -0.05 can the existing tax on disposable containers be optimal.

Recall from the discussion of (31), however, that when qz vanishes, there is no reason to tax the containers on second-best grounds. We therefore conclude that with qz = -0.7, the existing ad c&rem tax rate is too small for a second-best tax. If qz is very small (to justify the existing tax rate), then the contribution of a second-best tax to economic efficiency is very small. If, however, the contribution of the tax to economic efficiency is negligible, it can at least be concluded that the ad valorem tax on disposable beverage containers need not be the inefficient excise tax that it has been alleged to be.

CONCLUDING REMARKS

The problem of litter is especially severe in Israel. To rectify the problem, a law has been enacted that makes it illegal to litter and provides an infrastructure for apprehending and fining violators. Using crude approximations, we estimate that the actual effective fine on littering is very small in comparison to the efficient effective fine. Assuming that there are political and other constraints in Israel to prevent the actual effective fine from being increased, then a second-best policy is appropriate.

The Muinrenunce of Cleanliness Law authorizes an ad vulorem tax of 0.25% on disposable drink containers. This tax is evaluated within the framework of second-best theory. It is shown that in the limiting case in which littered containers are a fixed proportion of all beverage containers, the existing tax rate is only one sixteenth of the correct tax rate. However, if littering is sensitive to the price of beverages, we do not have sufficient information to reject the hypothesis that the existing tax rate is or is not optimal. However, in order to justify the existing tax rate of 0.25%, the cross elasticity of the compensated demand for beverages in disposable containers with respect to the effective fine must be very small. But then the contribution to efficiency of a second-best tax on containers is also small.

It should again be remarked that the results of this paper are based on the assumption that Porter’s [12, p. 3561 lowest estimate of the rate of littering beverage containers in Michigan prior to mandatory deposits holds for Israel. In fact, there is good reason to believe that the littering rate in Israel is higher than the rate in Michigan, in which case the major conclusions of this paper are strongly reinforced. It should also be emphasized again that this paper focuses specifically on features of the Maintenance of Cfeunliness Law, and especially on the fines for littering and the controversial ad vuforem tax on disposable beverage containers. We do not undertake to evaluate alternative first-, second-, or third-best approaches that might advantageously address the problem of solid waste in Israel along with the problem of litter.

Acknowledgements-Kohn was a visiting professor at Hebrew University of Jerusalem when this paper was begun. Pines gratefully acknowledges financial assistance from the Foerder Institute for Economic Research. We thank Uri Marinov. Yitzhak Gil. Shlomo Brovendar and Uri Amit, Director General and staff members, respectively, of the Environmental Protection Service of Israel and Zev Ellenbogen, Deputy Director of the Economic Planning Authority of Israel. for useful background information and Richard C. Porter and David E. Wildasin for very helpful comments. One of the early working papers [6] that we sent to the Environmental Protection Service for comments was inadvertently reproduced in their Isruel Enrironmenr Bulletin.

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A second-best tax for litter abatement 9

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